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 FICO) 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 FICO or a system based on FICO 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
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
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
How are credit scores calculated?
The methods of calculating your FICO 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 FICO. 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 FICO
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 FICO score does not reflect these facts as it only
evaluates the information retained by the credit reporting agency.
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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
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
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
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
Make sure the information in your credit report is correct. If
its not, dispute it with the credit agencies and/or with the
Removing negative items on your credit reports has the biggest
impact on your FICO 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
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Lexington Law Firm, they are the industry leaders.