Understanding Credit Scoring
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Your credit rating it is one of the most critical factors within your financial life. It determines should you be approved for a loan or personal credit line. A credit score is a mathematically calculated number developed by the Fair Isaac Corporation (FICO) that lenders use to rate potential prospects in determining the possibility that a customer will probably pay their bills punctually. A credit score or credit score is determined by using five main criteria as determined by MyFico.com: your payment history which accounts for 35% of your credit score, the amounts owed which is the reason 30% of your credit score, the length of your credit history which is the reason 15% of your credit score, new credit which is the reason for 10% of your credit score, and also the types of credit used which is the reason 10% of your credit score.
Payment history shows the historical past of how you paid your expenses either on time or late unfortunately does not show if the bills were paid before the due date. Amounts owed shows the total amount of credit available to you. If your balance is close to the credit limit this may reduce your credit score. The length of history indicates how long you have had credit. Should your credit history is 24 months or less could lessen your credit score. New credit indicates how frequently you have applied for new credit. In case you open two many new accounts inside a short period of time this may decrease your credit score. The types of credit used indicate the types of accounts you have such as revolving or installment accounts. Revolving accounts usually are credit cards and installment accounts are usually mortgages, auto loans, etc.
The FICO credit history model ranges from 300-850 with 850 as an excellent score and 300 being the worst score. The larger the credit score the lower a person's eye rate you will receive to borrow or line of credit. Developing a good credit score can save you 1000s of dollars in interest within the life of the loan or personal credit line. A good credit score is generally inside the range of 660-749 but may differ from lender to lender.
The three major credit bureaus Experian, Equifax and TransUnion use the FICO credit history model. Equifax uses the Beacon credit score, Experian uses the Fair Isaac or Plus score and TransUnion uses the Empirica score. Each credit agency subscribes to the Fair Isaac's FICO style of scoring and then integrates their very own version of a consumer's FICO score. The Equifax Beacon score varies from 340-820. The TransUnion Empirica score varies from 150-934. The Fair Isaac or Plus score varies from 330-830.
When applying for credit or a loan if the three credit scores are pulled, the middle score is generally the score combined with the application, but in line with the Fair Isaac Corporation 75% of mortgage loan applications use the Fair Isaac or Plus score.
Your credit score varies from each bureau because each agency collects their own data from various sources and might collect different data for a similar account. Your score may vary anywhere from 5-40 points involving the three credit bureaus. Your credit rating changes due to updates for your credit file which changes based on account activity including balance changes or additions to your credit file (i.e. new accounts or deletion of older negative accounts greater than 7 or 10 years old). As a result, you may even see a difference in your score from one month to the next.
The next criteria are not contained in calculating your credit score:
1. If rent or you own a home
3. Amount of time at your current job
4. Time period at your current address
5. Whether you've been denied credit
However, these may be considered in approval for a loan in addition to using your credit history.
If you have a low credit score listed below are 5 things you can do to enhance your credit score:
1. Stop with your credit cards and pay with cash.
2. Pay greater than the monthly minimum. If you fail to, it's time to cut spending.
3. Build a plan to reduce your total debt.
4. Reduce your interest rates, but watch out for the fine print--a credit card with 0% interest cost you thousands in interest for that the credit card is structured.
5. Get a part-time job in addition to your full-time job or find ways to reduce expenses and use any additional money to pay down debt.
The most important disadvantage of credit scoring would it be relies on information in your credit report which may contain errors. Roughly 75% of credit reports contain one or more error. That's why it's so important that you check your credit report at least once a year to make sure that all information is accurate and as much as date.
If you plan on getting a large item for instance a car, house or investment property, it is advisable to pull your credit yourself to see if any negative items appear to help you fix those troubles before applying for a loan. The ultimate way to understand your credit score would be to do research and read the information that is provided when you order your credit report.
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