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Understanding Credit Scoring

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To your credit rating it is one of the most critical factors in your financial life. It determines if you are approved for a loan or credit line. A credit score is a mathematically calculated number developed by the Fair Isaac Corporation (FICO) that lenders use to rate prospective customers in determining the likelihood that a customer pays their bills on time. A credit score or credit rating is determined by using five main criteria as based on MyFico.com: your payment history which is the reason for 35% of your credit score, the amounts owed which is the reason for 30% of your credit score, the duration of your credit history which is the reason 15% of your credit score, new credit which accounts for 10% of your credit score, and the types of credit used which is the reason for 10% of your credit score.

Payment history shows the historical past of how you paid your bills either on time or late unfortunately does not show should your bills were paid prior to the due date. Amounts owed shows just how much of credit available to you. If your balance is near the credit limit this may lower your credit score. The length of history indicates just how long you have had credit. Should your credit history is A couple of years or less could lower your credit score. New credit indicates how often you have applied for new credit. In the event you open two many new accounts inside a short period of time this may lessen your credit score. The types of credit used indicate the sorts of accounts you have for example revolving or installment accounts. Revolving accounts usually are credit cards and installment accounts are often mortgages, auto loans, etc.

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The FICO credit score model ranges from 300-850 with 850 becoming an excellent score and 300 to be the worst score. The greater the credit score the lower a persons vision rate you will receive for a financial loan or line of credit. Developing a good credit score can save you lots of money in interest within the life of the loan or credit line. A good credit score is generally within the range of 660-749 but may change from lender to lender.

The three major credit bureaus Experian, Equifax and TransUnion use the FICO credit history model. Equifax uses the Beacon credit standing, Experian uses the Fair Isaac or Plus score and TransUnion uses the Empirica score. Each credit bureau subscribes to the Fair Isaac's FICO model of scoring and then integrates their unique version of a consumer's FICO score. The Equifax Beacon score varies from 340-820. The TransUnion Empirica score varies from 150-934. The Fair Isaac or Plus score varies from 330-830.

When applying for credit or a loan if seventy one credit scores are pulled, the center score is generally the score combined with the application, but according to the Fair Isaac Corporation 75% of mortgage loan applications use the Fair Isaac or Plus score.

Your credit rating varies from each bureau because each agency collects their very own data from various sources and might collect different data for similar account. Your score may differ anywhere from 5-40 points between the three credit bureaus. Your credit rating changes due to updates on your credit file which changes depending on account activity including balance changes or additions to your credit file (i.e. new accounts or deletion of older negative accounts greater than 7 or 10 years old). As a result, you may even see a difference in your score in one month to the next.

The subsequent criteria are not incorporated into calculating your credit score:

1. If rent otherwise you own a home

2. Income

3. Period of time at your current job

4. Length of time at your current address

5. Whether you are denied credit

However, the aforementioned may be considered in approval for a financial loan in addition to using your credit history.

If you have a low credit score allow me to share 5 things you can do to enhance your credit score:

1. Stop making use of your credit cards and pay with cash.

2. Pay greater than the monthly minimum. Folks who wants, it's time to cut spending.

3. Produce a plan to reduce your total debt.

4. Reduce your interest rates, but be careful of the fine print--a plastic card with 0% interest could cost you thousands in interest for a way the credit card is structured.

5. Obtain a part-time job in addition to your full-time job or find approaches to reduce expenses and use any additional money to pay down debt.

The main disadvantage of credit scoring would it be relies on information with your credit report which may contain errors. It is estimated that 75% of credit reports contain a minumum of one error. That's why it's extremely important that you check your credit file at least once a year to ensure all information is accurate and as much as date.

If you plan on buying a large item such as a car, house or investment property, it's best to pull your credit you to ultimately see if any negative items appear in order to fix those troubles before applying for a loan. The easiest method to understand your credit score is always to do research and read the information that is provided whenever you order your credit report.


Posted Dec 23, 2015 at 7:30am