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Credit scoring is nothing new. Credit card issuers have used
credit scores for years to evaluate applicants. Most mortgage
companies have been using credit scores in their approval
process. With increased automation in the credit approval
process and the shift by lenders to "risk–based pricing," your
credit score is becoming a major factor in determining whether
you are approved and what terms you get. Your credit score is
a number usually derived from data maintained electronically
by national credit repositories using a statistical model. The
credit score is a number that tries to predict your future
behavior based upon past history. It may well determine how
quickly and hassle–free your loan is processed, beyond a yes
or no at the application table.
What is a credit score?
Your credit score isn't the same as your credit file, though it is
derived from the data in your credit file. Your credit file is a
listing of your accounts and payment histories with lenders,
while your credit score is a snapshot ranking that attempts to
predict your future behavior. There are different types of credit
scores. Credit bureau scores are based solely on information in
consumer credit reports, other types of scores may also include
information from credit applications or bank files. Information
such as race, religion, gender, marital status and birthplace are
not included. A common scoring model used by lenders, among
the many available, is FICO, developed in the 1960s by Fair
Isaac & Co. of San Rafael, California. Your credit file data at
the three national repositories––Experian, Equifax, and
TransUnion–– is put through Fair Isaac's mathematical
scorecards and yields a number between 300 to around 900.
What goes into credit scoring?
Fair Isaac's model focuses on interrelationships among roughly
100 predictive variables, including the number of jobs you've
held, marital status, how long you have been living at your
present home, how long you have been a credit user, how
you've used credit lines, how actively you are seeking new
credit, your level of indebtedness, and the like. The higher your
score, the less likely you are to default on your loan,
statistically speaking that is.
What is my credit score?
Although your credit score may play an important role in
determining whether and on what terms you receive a loan, you
have no legal right to demand to see your score or receive
information on how it's interpreted by your lender. Many
consumer advocacy groups criticize this process as elusive,
unfair and potentially damaging to consumers. The credit
industry has no simple answer to what exactly determines your
score or how to improve it. In theory, credit scoring is meant to
increase the speed, efficiency and fairness (removing biases)
of the lending process. It was not meant to be used as the sole
determining factor as to whether an applicant deserves to be
approved for a loan. Unfortunately, some lenders still use it that
way.
How to Improve Your Score
Here are some basic do's and don'ts which should help boost
your scores:
Do check your credit report regularly. If you discover
incomplete, or inaccurate information, have it corrected,
especially before you apply for any loans. Incomplete or
inaccurate information can negatively impact your score,
particularly if it is derogatory.
Don´t max out your credit cards. Better yet, keep the balances
well below your credit limit. It is statistically better to have
smaller balances against more cards than to have high
balances relative to your credit limits lumped on a few cards.
Don't view your credit limit as your spending limit. The important
thing is to never look "extended."
Do pay your bills on time. This is one of the most important
factors in your credit score and it is significant over time. Late
payments (30/60/90) and, worse yet, missed payments, which
give the impression that you do not take your financial
obligations seriously, can destroy your credit rating.
Don´t apply for credit, or open new accounts, unless you need
to. Too many inquiries, as well as too many accounts, are
viewed negatively by credit extenders. Therefore, in order to
put yourself in the position of getting the credit you need, when
you need it, never create the impression that you are always on
the prowl for credit.
Do negotiate with your credit card companies to secure lower
interest rates. Before you simply close a high interest rate
account, contact the issuer and see if you can negotiate a
better deal. While you should always strive to get the lowest
rates, lenders always look at your stability (i.e., how many long
term accounts that you have). Therefore, it is important to show
that you make your payments on time and you have long term
relationships with your lenders.
Don´t card hop. While it is important to seek out the best rates,
if you appear to be someone who jumps from lender to lender,
this will not help your credit rating. Longevity of accounts is the
name of the game. If you continually open and close accounts,
you will not develop the type of stable credit history credit
extenders want to see. Therefore, if you do find a significantly
better rate, don't close the higher rate account. Pay it off and
then request that your credit limit be reduced to $100. This way
you get out from under an onerous rate, while keeping the
credit reference.
