Credit Scoring is kind of like a report card. It is a mathematical formula based on how you have paid your bills, what you are still owing on your bills and other financial information all related to your credit. Most every bit of information that is created when you use credit either creates a negative or positive point. Some will actually end up being neutral towards your actual score. Your score is derived from your credit history and converted into a number. This is done so that creditors can process your risk quickly and fairly accurately. Your score has become the basis on what most credits will consult before lending. The reason is simple, if each creditor actually had to read through your credit history, they would have to come up with their own assessment.
This would be very time consuming as they may deal with several different people each day. Instead with a simple number that credit bureaus create for you, your credit worthiness can be assessed almost immediately. However, this doesn’t mean that a credit will only consider your credit score. They may consult your credit history for what they may deem as more important for their business. If your credit score is not where you want it, companies like thecreditgeeks.com are there to help raise it and get you back on your feet.
While your credit score is very important, it doesn’t necessarily tell the entire story for a potential creditor. They may wish to find out more specific information relating to your actual financial practices. Some examples would be perhaps you are in a smaller town. Word of mouth, whether reliable or not, may play a bigger role in someone’s trust. Some creditors may also grant you more favor if you now have a good job and decide that is a more important factor than whether you paid off a few bills late a year or two ago. Other determining points of interest could be someone’s age or overall wealth and other factors. However it is illegal to discriminate on someone’s ethical race, sex, religion etc, unfortunately I am sure occasionally it happens. For this reason if you think you are being treated unfairly due to one of these factors, you may want to go see a different creditor.
If you are denied credit, your creditor is legally obliged to release the information as to why you where not granted credit if you want to know. They do not however have to release how exactly they determine their own scoring technique. The reason they have to at least let you know the reason why you where denied is because there is an act called the Equal Credit Opportunity Act (ECOA) stating they must. This actually favors both the lender and the consumer because it lets you know what you can improve in order to then in the future reapply and be accepted. It helps the lender because then they can lend out money/credit and thus earn interest on it.
The term credit score has become synonymous with FICO score. FICO stands for Fair Isaac Corporation. Your FICO score will range between the numbers 300 and 850. The higher your number is, the better your credit score is. While it is subjective, if you have a score of around the 650 mark and above, you have a pretty good credit score and will have relative favor in obtaining credit. Each credit bureau will have a FICO score for you but they will not necessarily be the same due to issues discussed on the home page of this website. Each bureaus may refer to their score as the following:
Trans Union: EMPIRICA® Score
Experian: Experian/Fair Isaac Risk Model
Equifax – BEACON® Score
How is your credit score calculated?
Payment History makes up 35% of it. This includes issues such as how well you paid off your previous debt/credit. Did you pay them late? Any overdue payments? Any bankruptcies? Wage garnishments?
Length of your Credit History accounts for 15%. How may years have you been obtaining credit for? If you are new your level of trust will be lower than someone who has several years of a good credit history.
How much new credit have you obtained 10%. How many new credit accounts have you opened recently? Have you made many inquiries? Opening several new accounts will be seen as a negative where as if you have already several open and are paying them back well it will not necessarily be.
How much you owe accounts for 30%. How much are you in debt to your current creditors? By keeping the amount you owe on your credit cards in the lower third of your maximum looks much better than if you are close to being maxed out on them.
The types of credit you have obtained already accounts for the last 10%.
Again, while ones credit score is not the entire story to ones credit, it represents an easy number for creditors to refer to. Generally (these numbers are plus or take) these numbers below can be a fairly decent representation of how creditors will see you.
A credit score of:
> 720: is an Excellent Score
660- 719: Very Good
620- 659: Fairly Good
< 600: is usually considered bad credit.
About 75% of people have numbers between the 600-800 range.