 |
||||||||||||||
 |
||||||||||||||
|
What Is A Credit Score?A credit score is not about your IQ or your college grade point average. It’s about how well you have managed your available credit. In today’s world, nearly everything a person wishes to buy will more than likely have to be purchased on credit. Very few people will have the resources to pay cash for a home, a vehicle, a vacation or even what some people may consider life’s necessities. Applying for a home mortgage, a car loan, a MasterCard or Visa credit card and a department store credit card are common place activities that enable individuals to own today what they can pay for tomorrow or even much later. Experian, TransUnion and EquifaxWhen someone applies for credit from a bank or other type of finance company, the potential lender will check their credit score to determine whether or not they want to risk loaning that person the money or credit that they have asked for. This credit score is based on information that is in their credit report. There are three major credit reporting agencies, Experian, TransUnion and Equifax. These agencies gather information from a person’s past lenders and compile it together in their personal credit history file. Then they will sell this information to any future lender that they apply to for credit. If a person is fresh out of high school and has not applied for credit anywhere yet, or maybe has only one or two lines of credit for a short period of time, like under six months, then they probably won’t have much of a credit history file, if they even have one at all. In this case, their credit score may not exist yet or it may be very low.
Mortgage and Loan QualificationBut most people want the “American Dream“. They will want to purchase their dream home or they may need a new dependable vehicle, so the objective will be to have a very high credit score. The higher a person’s credit score is, the more likely it is that they will qualify for a mortgage or vehicle loan or even a major credit card. Not only is it important to qualify for a loan, but it is important to receive the loan with the best interest rate possible and the lowest payments possible. This will save them money during the life of the loan. High interest loans calculate into thousands of dollars more that a person will have to pay when they eventually pay off this debt. FICO ScoreCredit scores will vary depending upon the credit reporting agency giving out this information. Each agency may have different information in the credit history file that they have for an individual. The most widely used scoring system is the FICO (Fair Isaac and Company) credit scoring system developed in the mid 1990’s for mortgage lenders. The credit score is calculated for a consumer on a number between 300-850, with the higher end translating into what lenders determine is a better credit risk. Virtually all lenders today will request from one of the credit reporting agencies or possibly all three of them, a person’s credit score before making a decision to offer them the credit that they have asked for. Credit Score Calculations35% of a person’s credit score is determined by how timely they have made past payments on previous lines of credit. Late payments, write-offs, tax liens, judgments and bankruptcies will all have a very negative effect of this part of the scoring system. The next 30% of the credit score is based on how much debt a person owes. If their credit cards are maxed out and they have too many of them along with several other loans, then it does not give the appearance that this person is managing their finances very well and it will bring the credit score down. It is much better to keep credit card balances low in comparison to their available credit. 15% of a person’s credit score is figured in connection with how long they have been extended credit. At least six months of credit history is important in calculating this number, but this information is also weighed against how responsibly they have used their credit. The next 10% is based on recent applications for credit. However, the FICO credit scoring system knows how to determine the difference between someone who is seeking a lot of opportunities to own multiple credit cards for irresponsible spending and someone else who is simply shopping for the best interest rates to buy a home. If a person wishes to shop for the best interest rate on a loan, keeping several applications for credit within a 14 day period will not have as negative an impact on their credit score. The Credit MixThe last 10% of an individuals credit score has to do with their credit mix. In other words, it looks better on a credit report and it will increase the credit score slightly to have different kinds of credit lenders, like mortgage lenders, auto lenders, credit cards and other finance companies rather than a credit report that contains only multiple credit cards. The previous situation appears more normal and stable for persons as they progress through life situations. Whereas, the latter situation appears a bit “fly-by-night” or unstable, especially for someone with a longer history. Credit Scores and the LawIt is against the law, however, to calculate a person’s credit score based on things like their race, religion, color, sex, national origin, marital status or whether or not they receive public assistance. These things obviously have nothing to do with how well a person will pay back a debt and would be considered discriminatory if used that way. Another thing that is not included in the figuring of a credit score is a person’s income. Although this would definitely influence whether or not someone could pay back a debt or not, it is not used to calculate someone’s credit score. Neither is a person’s employment history used to calculate their credit score. However, some lending institutions will use their own method of determining whether or not to extend credit and this may include the FICO credit score and these other factors such as income and employment history. Annual Free Credit ReportsThe Fair and Accurate Credit Transactions Act added in 2003 allows for persons to receive a free copy of their credit report each year. In addition an individual may purchase a credit report through the three major credit reporting agencies after submitting proper identification. Most mortgage lenders will offer to an individual their credit score after they have applied for a loan with them, especially if they were refused a loan. Knowing your credit score is important when it comes to reaching your goal of strong financial health. Improving your credit score can be as simple as making corrections on your credit report or it may take a little bit of time for the good credit management that you are now practicing to appear on your credit history. For more information on credit scores, consult the following links. FTC Website - Credit Report Scoring |
|||||||||||||
| ||||||||||||||
