ABOUT
CREDIT
YOUR CREDIT SCORE. WHAT IT IS. WHAT IT MEANS.
You may have heard of credit scores and wonder what they are. How do they
affect your ability to get a loan? How do they affect the interest rate and points you have
to pay? You may wonder whether your credit score is accurate.
Who Uses Credit Scores?
Credit
scores are used by different Creditors in different ways.
Lenders: Mortgage, Auto, Credit Card
When Lenders
consider your loan application, they use a process called
underwriting to evaluate your ability and willingness to repay your loan. They may judge
your ability to repay by looking at your income and how stable your past earnings have
been. They judge your willingness to repay by looking at your past credit history. Lenders
use credit scores in the underwriting process much as colleges used SAT and
ACT scores in the admission process. The scores are not the only factor for
admission, and each school interprets the scores in its own way.
Home and Auto Insurance
The insurance industry uses an 'insurance score' to determine your premiums.
Your insurance score, in large part, is based upon your credit score.
Employment and Rental
Your credit scores are used by some potential
employers and apartment owners.
How Do Credit Scores Affect Loan
Prices?
The price of a loan consists of the
interest rate and the fees charged by the Creditor. Just as credit scores are a factor in determining if you qualify for a
loan, they may also be a factor in determining the price of your loan.
Lenders and other Creditors use credit scores as predictors of your ability and willingness to repay the loan.
Applicants with lower credit scores may pay higher prices for their loans because of the
higher risk of default and loss.
What Are Credit Scores?
A credit
score is a numerical value that grades your credit history at a given point in time.
Credit scores are designed to indicate
how likely someone is to make their loan payments on time. Millions
of consumers’ credit records were used to develop the scorecards, and all of the
consumer data - not just negative information - was included to develop the system. Scores range from approximately 300 to 850. The higher the score, the more likely someone is to
make their payments. The lower the
score, the more likely someone is not to make their payments.
How Are Credit
Scores Calculated?
Lenders and credit providers have the option of sending
information about your accounts to one or more of the major Credit Reporting
Agencies. Each Agency assigns a score to your credit record.
Each Agency calculates scores differently. Your score is based on
your past payment history, the amount of credit you have outstanding, the
amount of credit you have available, and other factors.
You can go to the Agency websites for more information on how they each
score:
The Credit Reporting Agencies do not publish their scoring details
to anyone, however, so no one can tell by exactly how much any
action will affect a score. No one can tell you, for example, by how
many points your
credit score will change if you pay off a delinquent account or cancel a credit card. We do know, however, that there are things you can
do to improve your credit profile.
How Can You Increase Your Scores?
When you understand what affects your scores,
you can use that information to increase them.
Number of Accounts (Trade
Lines)
The number of credit cards, lines of credit and
other types of credit (trade lines) you have available affects your
score. If you have too many active accounts, your score may be lower because of the risk that you might not be able to
continue making your monthly payments. You may consider
closing some accounts. If you close an account voluntarily, it will not
affect on your credit score. On the other
hand, if you have too few trade lines this will likely decrease your score. Lenders generally want to see that you have some
available credit and that you can demonstrably handle your credit wisely.
A Credit Coach can help you to determine a favorable number of accounts.
Click here
for information about
credit cards.
Account Balances and Credit
Limits
The amount
outstanding on each of your credit accounts will also affect your score. In
general, the lower the amount outstanding, the more likely it is that
your score will be higher. The closer your balance approaches the limit
for that account, the more negatively your score is impacted. Avoid going
over the limit on any account. If you must carry balances on your accounts,
it's best to distribute the 'weight' as evenly as practicable amongst your
various accounts.
Credit Repair - Correcting
Errors on
Your Credit Report
According to a Massachusetts
Public Interest Research Group (MASSPIRG) 2004 study:
It's a good idea to check
your credit reports for errors and correct them with the
Credit Reporting Agencies. There are different ways to
do this, with the most effective being written letters.
You can obtain a free credit report from
AnnualCreditReport.com,
which is the only website that is sanctioned by the Federal government.
Time is On Your Side
Making
your payments on time is the best way to increase your score. The longer you
make payments on time, the better your score will be. The more time you put
between yourself and any delinquencies, foreclosures, bankruptcies and
judgments will increase your score.
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