Credit Score: A Guide to Credit Scoring and Improving Your Credit Score
Credit Score: A Guide to Credit Scoring and Improving Your Credit Score
Written by: Vishy Dadsetan
Don’t get excited guys, this is not that kind of score and its
impact lasts much longer than 30 seconds. We are talking about
credit scoring and Credit Score that is also known as FICO (Fair
Isaac & Co.) score.
So what is credit scoring? You have heard of personality
profile that dating services use to find the best match between
people. Well, credit scoring is a mathematically calculated
financial profile lenders use to match applicants with loans.
Credit scoring is a way for lenders to determine how much risk
is involved in lending money to you and based on that risk they
may decide not to lend money to you at all or change the terms
of the loans to match the risk.
Who uses credit scoring? Credit scoring has been around
for ever, that is since 1950s, and it was first used for issuing
credit cards and auto loans. Now all sort of creditors including
home mortgage lenders use it. But they also consider other
factors such as your salary, your employment and your
assets.
So what’s in a
score? Pick a number, any number between 300 and 850.
That would probably be someone’s Credit Score also known as FICO
(Fair Isaac & Co.) score. In the eyes of potential creditors,
scores closer to 850 indicate more credit worthiness, which in
turn comforts these skittish creditors that you are more likely
to pay your loan than a person with lower Credit Score.
The following are an interpretation of what various FICO score
ranges mean.
* Excellent: Over 750
* Very Good: 720 to 750
* Acceptable: 660 to 720
* Uncertain: 620 to 660
* Risky: less than 620
What impacts my
Score? This Credit Score number is a relative number and
as much as possible objective. By relative I mean that it
compares your financial habits with others in similar situation.
The first step is gathering information about how you treat
money, do you pay your bills on time, how many credit accounts
you have, what type, do you have any collection action against
an account, how much total debt you have, and a bunch of other
data.
Then the objective part kicks in by using mathematical
calculation that do not care about how you look, what religion
you have, etc. The lenders only want to know how likely you are
to pay their money back in a timely manner and without hassling
them.
The FICO score calculations consider the following factors:
Your payment history 35% : Do you pay your bills on time? Have
you ever been delinquent, or are you consistently late? How
about collection notices and bankruptcy? The answer to these
questions account for about 35% of your Credit Score.
Total debt : How much do you owe lenders compare to the total
amount you can borrow impacts about 30% of your Credit Score. If
your credit cards are close to being maxed out, it may indicate
looming financial problems and a possibility of default and it
drops your Credit Score.
Length of credit history: Approximately 15% of your Credit Score
calculation depends on how long you have had your accounts?
Three days, six months, ten years? The longer credit history has
a positive impact on your Credit Score.
Taking on more debt: Are you taking on more new debts? Even
applying for too many new cards too quickly may be considered as
financial difficulty and impacts your Credit Score in a negative
way. This builds about 10% of your Credit Score.
Types of credit in use: About 10% of your Credit Score depends
on the type of credit mix you have. High ratio of credit cards
and installments loans in relationship to mortgages has a
negative impact on your Credit Score.
Why do I need to check my credit report from each major
credit bureau?
Despite normalization of credit scoring system that gives credit
scores about the same value at all major credit bureaus, the
information reported to these bureaus are not identical. So, one
credit bureau may receive information that impacts your credit
scoring one way and another credit bureau receives another set
of information that impacts your credit scoring in another
way.
The good news is that as of September 1, 2005, as an American,
you can ask for a free credit report from each of the major
nationwide consumer reporting companies once every 12
months.
Four simple tips to improve your
score:
* Pay your bills on time, especially your mortgage and your
installment loans.
* Borrow below your credit limits and do not max out your credit
cards.
* Carry two or three credit cards only.
* Don’t apply for several credit cards at one time.
About the author:
How Much Traffic Can A Good Article Bring Your business? Vishy
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