Not long ago credit reports and credit scores only reflected our use of credit and were used to gauge risk by creditors. The questions; 'How credit worthy are we?', 'How likely are we to pay off our debts?' and 'Will we pay on time or not?' have now been joined by employment and lifestyle questions. Our credit behavior is also looked at as an indicator of how we are likely to behave in other areas.
Employers look to credit reports to see if we'll be good employees. Leasing companies pull credit reports to see if we'll be reliable renters. Auto insurers review credit information when determining what level of insurance risk we pose. With the ever increasing importance of credit scoring in our lives you would think that a deeper understanding of credit reporting would have been available all along. Nonetheless, for years there's been a major component of the credit report that the average consumer has been unable to see.
YOUR CREDIT RISK SCORE
The scores range from 300 to 850, with a higher score being better than a lower one. It's called a credit risk score and if you have a credit report you have a score too. Fair Isaac Company, (FICO) which is the country's pre-eminent producer of credit scoring models, uses information from your credit report, applies different weights to different pieces of that information and to the history of the information, and calculates a score for you.
When a creditor is trying to decide whether or not to give you a credit card, for example, or what rate of interest to charge on your mortgage , the FICO score is one important factor they consider in making those decisions.
HOW MANY LENDERS USE THESE SCORES?
We know that over 3/4 of home loans are decided with help from FICO risk scores. If you look at the 100 largest financial institutions in America, 70 percent use FICO scores. So credit scores are a big player in the marketplace.
HOW DO MOST PEOPLE DO?
Better than you might think, considering that bankruptcies are in the headlines so often these days. With the scale ranging from 300 to 850, the average score is about 720.
Having a score below that, you may have problems borrowing. Here in the States, 20% of people score below 620. Since that population includes about 50% of all people who default on their mortgages, lenders are very wary of extending credit to them. The next 20% of people score between 620 and 690. Scores in this range may not stop you , but buyers of mortgage pools on the secondary market require that lenders scrutinize borrowers much more closely before lending. On the high end of scoring, anything above 780 is considered elite. Only about 1 - 2% of consumers score in the 800s.
There are some significant factors that make a difference in your score. Let's discuss them and look at how you can make changes to factors to improve your FICO score:
- Your record of payments (35 percent of your score). We all know it's important to pay our creditor bills on time. If you always have, you have done fine in this category. If you slip up here and there, it can hurt your score significantly. The more recent the payment mistakes, the more seriously it hurts your current scores. An apparent pattern of bad behavior is much worse than the occasional one-time mistake.
Multiple or consecutive 30-day late payments are worse than one 60-day late payment. (The way credit scoring models work is to compare your habits to a group of other individuals who are known to have acted in a positive or negative way overall. Of course, there are different groups of patterns, so that a seasoned credit user won't be compared to a new credit user, etc.)
- How much debt you are carrying now (30 percent). The scoring companies look at how much you owe in relation to how much available credit you have on your
credit cards and other accounts. The closer you are to topping-out your accounts, the lower you'll score on this criteria. Don't think that owing nothing improves your ability to handle credit it the eyes of the FICO model. If you have no current debt the FICO scoring model has no means by which to gauge your ability to manage debt. As such, owing a little bit is better. As an example, being at 75 - 80 % of your limit would be viewed as a very high percentage and a negative; 60 % in most cases is bad enoughand will depress your scores. Having your debt balances at 20 to 30 % of your credit limits is ideal.
- How long you've handled credit (15 percent). When people are trying to get their spending under control, one of the things they do - indeed that we might advise them to do - is to make sure they don't have too many tempting cards in their wallet.
But, when it comes to your credit score, you may not want to cut up that one card you've had the longest. Then the credit scoring companies lose the ability to see just how long you've been managing credit. It may be better to keep that old card even if it's at a high interest rate, use it a couple times a year and pay it off completely rather than cutting it up.
- Mix of credit (10 percent): It's good to show that you can manage different kinds of credit. So having an installment loan (on a home or a car) as well as having a revolving credit account (credit card) is a positive.
- Pursuit of new credit (10 percent): The media often exaggerate how much searching for new credit can hurt you. That's because, a few years ago, the scorer's methodology was changed to reflect the idea that it was OK - indeed smart - to be shopping around for a loan. So all of your inquiries into a mortgage over a 30-day period now count as one. That said, if you have real credit problems and you're constantly shopping around for new cards or loans, it's going to hurt your score. Moderation is key. If you're out looking for new credit every month, it's a minus. Less frequently than that, you'll probably be okay.
Now that you that you know some of the major scoring factors you may use the information to either continue your already good credit or to start to improve items on your credit report that can have a major effect on improving your scores. After you get your credit report, you may use it to open up discussions with lenders in a preliminary way. You might address a mortgage broker by saying; "This is my score. How smoothly would the mortagage process go with my score?" Then, if you need to, you can work on your score before you apply for credit. Three to six months is a reasonable time frame for being able to significantly improve your FICO scores.
If you run a Web search for "free credit score," you'll most likely come up with a number of mortgage lenders and banks who may be willing to give your score to you. In some cases, you may have to actually apply for a loan. In other cases, giving them an e-mail address and phone number (so that they can market to you later, one assumes) seems to be sufficient. So if you're willing to give up some personal information, you can get your score for no money. Or you can pay the $ 9 - $13 to the credit reporting agencies and receive your scores. (Even if you're not up for checking your score, you should check your credit report about once a year. If there are problems, you should check all three of the credit bureaus.)
John Prentice is a Credit Expert in the Mortgage Industry,John provides
credit score repair information and a Credit, Finance & Mortgage newsletter at his web site:
www.AccelerateMyCredit.comArticle Source: http://www.ArticleSphere.com
