Credit Scoring Made Simple
It's your right to know what your credit score says about you. Finding out this information doesn't cost a lot and takes only minutes to do - which may be time very well spent.
So what is credit scoring?
Simply put, credit scoring is a method of assessing the credit risk of a loan applicant. It uses mathematical models to evaluate a person's credit worthiness based on their credit history and current credit accounts. The system was first developed in the 1950s, but has come into widespread use in just the last couple of decades.
In the early 1980s, the three major credit bureaus (Experian, Equifax and TransUnion) each developed scoring models that allowed them to offer a score based solely on the data of one individual. Creditors, especially those in the home mortgage industry, frequently use these scores when deciding who gets a loan and at what rate. However, it's worth remembering that creditors also consider other information, such as your salary or employment history, when making loan decisions.
What's in a score?
Credit scores are reported as a number, usually in the 330 to 830 range. The higher the number, the better the score. Creditors see the number as an indicator that an individual will repay a loan. Typically, scores are determined by reviewing the following data:
- Your history of late payments
- Current level of debt
- Types of credit accounts
- Length of credit history
- Number of credit inquiries
- History of applying for credit
Personal details such as race, gender and religion are definitely not considered when determining your score. It's also worth noting that each major credit bureau has its own method for calculating credit scores. However, the scoring models have been fairly well standardized so that a "600" score at one bureau is roughly the equivalent to the same score at another.
What's a good score?
Overall, a higher score indicates lower credit risk. People with high credit scores, all things considered, have a good chance of obtaining quality loans at the best interest rates.
Average scores indicate good credit, but also may point to potential trouble areas that creditors will want to look at and review. A lender may require additional documentation before a loan will be approved.
With lower credit scores, consumers may find that they can still obtain a loan. However, the process will be lengthier and more involved, as creditors consider scores below this threshold to be an indicator of greater credit risk.
Free credit report:
A Blueprint For Rebuilding Your Credit
So you're credit isn't great. It may even be bad. Don't give up - it's possible to bounce back and rebuild your credit history. The most important thing to remember is that from now on, any credit you keep or open must be paid on time, every time. You will begin creating a better credit picture in just a few payment cycles, a positive trend that potential creditors can use to gauge how serious you are about putting your credit past behind you.
In fact, being able to repay a variety of new accounts is a key step toward rebuilding your credit. So, devising a strategy to open and pay off as many different kinds of accounts as you can is a better objective than simply adding more debt to an existing credit card - especially, if you're working toward future goals such as a mortgage or other large loan.
- Rebuilding your credit can be similar to starting over from scratch, and starting small may be the easiest option. Credit cards from department stores or your local credit union can be useful.
- If you can't qualify on your own, ask a friend or family member to cosign for a small loan or credit card. If you can stay current on a major credit card account or small auto loan, this will speed up the process of re-establishing good credit on your own.
- Still no luck? Consider a secured credit card, which is guaranteed by a deposit that you make with the credit grantor. The cards offer the purchasing power of a major credit card. Just make sure the grantor reports payment histories to one of the three major credit bureaus so you're building your positive payment history.
- Use your new accounts in moderation and make payments that are more than the minimum. You can keep a small balance so that your positive payment history will continue to show up on your credit report.
- Avoid carrying a balance that is more than 30% of your credit limit (creditors may view it as excessive debt that you may not be able to stay current with).
- If you have money set aside, you can open such accounts for the sole purpose of paying them off.
It takes some time for your new credit history to gain momentum. You'll be demonstrating that you are not depending on certain credit cards and loans for survival. That's why opening and paying down accounts may make it a little easier to get more credit. With patience and timely repayments, you will likely be able to build a new credit history that creditors will look upon favorably when making decisions about your ability to handle even more credit.
Information above provided by Experian.com website.