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Understanding
Your Credit Score
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Ever wonder how a creditor decides whether to grant you credit? For years,
creditors have been using
credit scoring systems to determine if you'd be a good
credit risk. More recently, credit scoring has even been used
by potential employers when you go to apply for a
job.
Here's how credit scoring works in helping decide who gets
the job or the credit -- and why.
Credit scoring is a system creditors use to help determine whether to give you credit.
Information about you and your credit experiences, such as your bill-paying history, the number and type of accounts you have, late payments, collection actions, outstanding debt, and the age of your accounts, is collected from your credit application and your credit report.
Using a statistical program, creditors compare this information to the credit performance of consumers with similar profiles. A credit scoring system awards points for each factor that helps predict who is most likely to repay a debt.
A total number of points -- a credit score -- helps predict how
credit worthy you are, that is, how likely it is that you will repay a loan and make the payments when due.
Under the Equal Credit Opportunity Act, a credit scoring system may not use certain characteristics like -- race, sex, marital status, national origin, or religion -- as factors. However, creditors are allowed to use age in properly designed scoring systems. But any scoring system that includes age must give equal treatment to elderly applicants.
The following are factors to
consider if you would like to improve your credit score:
-
Have you paid your bills on time? Payment history typically is a significant factor. It is likely that your score will be affected negatively if you have paid bills late, had an account referred to collections, or declared bankruptcy, if that history is reflected on your credit report.
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What is your outstanding debt? Many scoring models evaluate the amount of debt you have compared to your credit limits. If the amount you owe is close to your credit limit, that is likely to have a negative effect on your score.
-
How long is your credit history? Generally, models consider the length of your credit track record. An insufficient credit history may have an effect on your score, but that can be offset by other factors, such as timely payments and low balances.
-
How long is your credit history? Generally, models consider the length of your credit track record. An insufficient credit history may have an effect on your score, but that can be offset by other factors, such as timely payments and low balances.
-
How long is your credit history? Generally, models consider the length of your credit track record. An insufficient credit history may have an effect on your score, but that can be offset by other factors, such as timely payments and low balances.
-
Have you applied for new credit recently? Many
creditors consider whether you have applied for credit recently by looking at "inquiries" on your credit report when you apply for credit. If you have applied for too many new accounts recently, that may negatively affect your score. However, not all inquiries are counted. Inquiries by creditors who are monitoring your account or looking at credit reports to make "prescreened" credit offers are not counted.
Because your credit report is an important part of many credit scoring systems, it is very important to make sure it's accurate before you submit a credit application.
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How many and what types of credit accounts do you have?
Too many credit card accounts may have a negative effect on your score. In addition, many
creditors consider the type of credit accounts you have. For example, loans from finance companies may negatively affect your credit score.
-
How many and what types of credit accounts do you have?
Too many credit card accounts may have a negative effect on your score. In addition, many
creditors consider the type of credit accounts you have. For example, loans from finance companies may negatively affect your credit score.
-
How many and what types of credit accounts do you have?
Too many credit card accounts may have a negative effect on your score. In addition, many
creditors consider the type of credit accounts you have. For example, loans from finance companies may negatively affect your credit score.
-
credit scoring may be based on more than just information in your credit report. For example,
some creditors may consider information from your credit application as well: your job or occupation, length of employment, or whether you own a home.
To improve your credit score you should concentrate on paying your bills on time, paying down outstanding balances, and not taking on new debt. It's likely to take some time to improve your score significantly.
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