Understanding My Credit Score
What Does Your Credit Score Mean?
Your credit
score is meant to provide a snapshot of the risk you currently represent
to a lender. Several parameters in your credit file, including length of
credit history, number of open accounts, loans, mortgages, public records, and
others are formulated to produce a three-digit score between about 300 and
950.
There are other scores used by lenders and insurance
companies (some of which are developed by FICO) such as Application and
Behavior scores. These other scores take other information into account.
Usually a lender will use a combination of your credit score with other
factors when determining your risk. They all have the same objective, to
determine the borrower's potential risk. Regardless of whether the score was
generated by FICO or a system based on FICO parameters, they all yield an
industry standard three-digit score. This score places the borrower in one of
three main categories (we named the third one ourselves.)
Prime, Sub-Prime, And Shafted
Prime If your credit score is above 680, you are considered
a "prime borrower" and will have no problem getting a good interest
rate on your home loan, car loan, or credit card.
Sub-Prime If your credit score is below 680, you are
"sub prime", and will likely pay a much higher interest rate on your
loan.
Shafted Below 560 is the shafted score. At least that is how
most lenders and credit issuers perceive it. You can still get a credit card
but you will likely be hit with a security deposit or high acquisition fee. In
addition to that your interest rate will likely be 22 to 23%. You can forget
about most home loans and the majority of new car loans at this score. Below
560 is no place to be. You will pay much, much more in higher interest and
unnecessary fees. You may even pay more for your insurance rates. A very low
score can even prevent you from getting a job with many companies. If your in
this category Click
Here.
How are Credit Scores Calculated?
The methods of calculating your FICO may differ slightly
depending on the credit bureau. When obtaining your credit score from one of
the Credit
Bureaus it is important to understand that your score does not come
directly from FICO. It is adapted to each bureau and is given its own name:
Equifax uses "Beacon", Trans Union uses "Empirica", and
Experian uses "Experian/Fair Isaac." These scores are also referred
to as your "Bureau Scores."
Since your score is derived from your bureau data, it will
change every time your reports change. However your score is calculated, it
will always take into consideration many categories of information. No one
piece of information or factor determines your score. As the information in
your credit report changes, the importance of one or several factors may
change in your FICO score. Lenders look at many things when making a credit
decision, including your income and the kind of credit you are applying for.
However, your FICO score does not reflect these facts as it only evaluates the
information retained by the credit reporting agency.
To Learn More Click
here.
What Factors Affect your Credit Score?
There are five factors which are used in credit scoring
calculations that determine your overall credit score.
Previous Credit Performance (Payment History) 35% A lender
wants to know what your payment history is like. Have you paid everything on
time, are you late on anything now, and so on. Your payment history is just
one piece of information used in calculating your score, although it can be
the very important.
Current Level of Indebtedness (Amount Owed) 30% How much is
too much? Can the borrower pay me and still afford to pay his other bills? Not
necessarily. Having available credit can actually help your ratio of debt to
available credit. These are the types of questions that most borrowers want to
know and the answers are almost as important as your previous credit history.
Amount of Time Credit Has Been In Use (Length of Credit) 15%
Generally speaking, the longer the credit history the better your score.
However, this factor only makes up 15% of your total score so even young
people, students or others with short histories can still score high overall
as long as the other factors show good. If you are new to credit than there is
little you can do to improve this part of your score. Open an account and be
patient.
Pursuit of New Credit (10%) Credit is much more popular
today. Just look at the number of credit card offers you get via the Internet
and in the mail. Consumers can now shop for credit and find the best terms to
meet their needs. Each time someone runs a credit check on you, it creates an
inquiry.
Fair Isaac has changed some of its calculations to account
for these new trends. Specifically, they treat a group of inquiries - which
probably represents a search for the best rate on a single loan - as though it
was a single inquiry (note: this only applies to auto or mortgage loan
inquiries.) For example, auto loan inquires that are within 14 days of each
other only count as one inquiry.
Types of Credit Experience (10%) A healthy mix of different
types of credit, installment loans, retail accounts, credit cards, and
mortgage. This score is not normally a key factor in determining your score
but it can help a close score. Its not a good idea to try and open different
types of accounts just to try and make this factor better. It will likely
reduce your score in other areas. You should never open accounts you don't
intend to use anyway.
What type of accounts you have, and how many, can make a big
difference. The optimal ratio of installment versus revolving accounts depends
on your profile and differs from person to person. One factor that seems to
have significant influence is your percent of open installment loans. Too many
can lower this portion of your score. For more information Click
here.
Improving
Your Credit Score
Now that you know how your score is calculated, you can
begin making changes to your current financial planning. The best things you
can do are simple.
Pay your bills on time. Sounds simple, but this is the
biggest thing you can do to keep your score high. Delinquent payments and
collections have a major negative impact on a score. Keep your balances low on
unsecured revolving debt like credit cards. High outstanding balances can
affect a score. The amount of your unused credit is an important factor in
calculating your score. You should only apply for credit that you need. Make
sure the information in your credit report is correct. If its not, dispute it
with the credit agencies and/or with the creditor directly. Removing negative
items on your credit reports has the biggest impact on your FICO score.
Generally, negative items stay on your reports for seven years but you can
hire a professional credit report repair service such as Lexington
Law Firm to do it for you. You can try to understand the laws and your
self, but we have found it's so much easier to have someone do it for you. We
strongly recommend using Lexington
Law Firm, they are the industry leaders.
