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Understanding
Your Credit Score
What
does your score mean?
This rating
system is meant to develop 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 FICOŽ) 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 FICOŽ or a
system based on FICOŽ 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 catagory
Click Here.
How are
credit scores calculated?
The methods
of calculating your credit score may differ slightly depending
on the credit bureau. When obtaining your score from one of
the Credit Bureaus it is important to understand that your score
does not come directly from FICOŽ. 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 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 credit 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.
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 credit 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.
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