Credit Scores
Understanding Your Credit Score
A personal credit score is a numerical representation of a consumer's credit and was designed to measure the relative degree of risk a potential borrower represents to a lender, based on extensive research into credit use patterns and actual credit data. A credit score gives a lender a fast, objective measurement of an applicant's credit risk. Using a credit score has become a popular tool to help lenders make a decision about loaning funds because it is fast, consistent and unbiased.
Your personal credit score is not physically stored as part of your credit file report. Rather, it is typically calculated at the time your credit report is generated. Because a credit check is an important part of many credit scoring systems, it is very critical when submitting a credit application that the information is thorough and accurate. Inaccuracies in a credit report can seriously impact a lenders’ likelihood of approving a loan.
What's Not in Your Personal Credit Score
Credit scores do not consider:
· Race
· National origin
· Religion
· Gender
· Marital status
· Place of residence
· Current interest rates on open lines of credit
· Rental agreements or child/family support obligations
· Account monitoring inquiries by companies
· Any information that's not on your credit report
· Whether you are participating in credit counseling
How Scores Are Calculated
Personal credit scores are calculated by one of many scorecards. Through this process, distinctive credit patterns are identified. Each pattern corresponds to a certain likelihood that a consumer will make his/her loan payments as agreed in the future. The score is based on all the credit-related data in the credit file report, not just negative data such as missed payments or bankruptcies.
Each of the national credit repositories also offers industry-specific scores. An industry-specific credit score allows lenders in the various industries to better assess certain factors in a consumer's credit file report. For instance, a lender in the automotive finance industry might request a score model that more closely evaluates the consumer's auto loan payment history.
A consumer's actual score is based on the credit data available in such consumer's files maintained by each of the repositories, and may vary from repository to repository. A consumer's credit score may also vary, depending on the score model requested (auto specific, bankruptcy, etc). Scores usually fall between 352 and 848 – the higher the personal credit score, the lower the potential risk posed by the consumer.
Why Lenders Use Personal Credit Scores
In general, lenders use credit scores because it gives them a quick, objective measurement of a borrower's credit risk. The higher the borrower's score, the lower the risk to lenders when extending new credit.
The use of personal credit scores makes credit application reviews more efficient for lenders and makes instant credit approval possible. Before credit scores, lenders manually looked over each applicant's credit file report to determine whether to grant credit.
Raising Your Score
How to get a credit report
Make sure you check your credit file report for inaccuracies. Get an accurate credit check by reviewing your reports from all three credit repositories once a year. It’s also imperative that you do this a few months before applying for a loan. If you find a mistake on your credit file report, such as a late payment, changes to your report can take up to three months or longer. Knowing how to get a credit report and understanding what it means can save you from unnecessary financial damage.
Pay your bills on time
Even if you've paid your bills late in the past, you can improve your personal credit score by paying every bill on time. It's especially critical that you make prompt payments close to the time you need a loan because a late or missed payment in the past year is likely to lower your score much more than an isolated late payment five years ago.
Reduce your credit card balances
Keep your debt balance low and reasonable on credit cards and other revolving credit. Even if you pay off your balances every month, try to avoid using more than 50 percent of your limit because your debt to credit limit is heavily weighted in determining your score. High outstanding debt can pull down your score.
Don't close unused credit card accounts
If you have several credit card accounts but are only using a few of them, you'll only raise your balance-to-limit ratio if you close the unused ones. You also shouldn't open new accounts when applying for a loan, if possible.
Apply for a credit card if you don't have one
If you don't have a credit card, apply for one and manage your credit responsibility by paying on time. You'll build up your credit history and, by paying on time, you'll raise your personal credit score. Someone who has no credit cards tends to have a lower score than someone who has a good credit history.