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"Your Credit"

Articles:

How is your credit calculated?

The Fair Credit Reporting Act

What is a good credit score?

How to fix common credit report problems.

How to raise your credit score.

Where to get your credit report online.

What is a Credit Score?

      Credit is based on an individual’s credit history and current credit accounts. A scientific method that uses acquired statistics is used to assess a person’s credit worthiness.

      In the mid to early 80’s the three major credit bureaus, Equifax, Experian and Trans Union, worked together to develop the basis for the credit scoring formula. This formula was based solely on the contents of the credit bureaus data of each individual. Each company has its own method of scoring but the credit score numbers are equivalent to one another. In other words, a score of 700 at one credit bureau is the same as the score of 700 at another credit bureau although the methods to determine the individual score are unique to the individual credit bureau.

      In the instance of a mortgage company, credit scores are knows as FICO scores. These scores are what the mortgage company basis it decision as to whether or not you get your mortgage. The scores range from 375 to 900 points. But, these scores are only meaningful to the individual lenders and what their own cutoff points are. Generally speaking, the higher the credit score the better credit risk you are and mortgage companies are more willing to deal. The higher the score the more favorable the terms or you loan will be. With a score between 620 and 650 you are still considered a good risk but lenders will look more closely at the individual and their history to determine the amount of the loan and its terms. Any score below 620 would most likely result in an individual being considered a greater credit risk but it doesn’t mean that credit would not be issued. In this case the process would be lengthier and the terms of the loan would be less than appealing.

      Essentially, since the creation of this scoring system, borrowers are more likely to receive an unbiased and speedy approval. With the generalized scoring individual lenders can no longer be prejudicial. The scoring system is objective and based on verified statistical data which brings a new level of fairness to the credit process.

      The factors that influence the FICO scores are based on information drawn from your credit report. There are about 30 factors that are broken down into five categories. First is your credit history. They want to know how long you have had your oldest account. Second is your payment history. Do you pay your bills on time, have you had any accounts turned over for collections, any judgments or bankruptcy’s or charge offs. Next is your outstanding debt. What is the amount of your balances and how many you have? They are looking for the ratio of total balances. Also, they look at how many inquiries for new credit that you have made and how long it has been since our last inquiry. Finally, they look for what types of credit accounts you have in use. They want to know if the cards are from department stores, bank card or loans and so on.

      With each credit check, the credit bureau also will provide you with a list of reasons for the credit store given and why you score may not be as high as others. They will usually provide you with four reasons that are taken off of a general list. The following are lists of some possible reasons for the credit scores you are given:

• late payments
• amount of monies owed is too high
• too many accounts with open balances
• payment history is too new to rate
• too many credit inquiries in the past few months
• too many new accounts open in the past few months
• too many accounts not paid as agreed
• too many past due accounts
• accounts sent to collections

      The above list is not exhaustive. There are any many variables that go into rating a credit score. Many of them not disclosed to the public. But generally it is the true that a credit history of on time payments is the biggest factor that will rate a good score.

      There are a few steps you can take that will help you improve you credit score but keep in mind that your score can change daily based on what information is available at the time of inquiry. The most important thing you can do to ensure that you develop a good and solid credit history is to pay you bills on time. The credit bureaus are aware that life happens and occasionally people make a late payment. This is unavoidable but a late payment of several years ago is less of a factor than a late payment of a month ago. Most negative information loses it’s potency over the years. That is not to say that it isn’t looked at, it is just less of a factor. Another step to take to assure a good credit rating is to check you credit report and remove any errors that there may be. You need to make sure that only accurate information appears on your report. This will insure that your credit score isn’t lowered by inaccurate information. You should also keep your debt reasonable. A good rule of thumb is that you should keep your account balances below at least 75% of your available credit. You should also maintain only a reasonable amount of unused credit. Having access to a lot of open credit makes you a poor credit risk. Close accounts that aren’t being used and only keep a few open as a cushion. Also, make sure that there aren’t too many inquiries into you credit history. These inquiries are assumed by the credit bureau to be that you are actively seeking more credit that could lead to financial difficulties in the future.

      The smartest thing you can do for you credit score and to maintain a good credit history is to be self aware and timely with your payments.