SolveYourProblem eLearning Series: Credit Scores
Help Me Improve
My Dreadful Credit Score
(
26 pages )
Your
Credit Score: Tips
Tip
#1: Understand where credit scores come from.
If
you are going to improve your credit score, then logic has
it that you must understand what your credit score is and
how it works. Without this information, you won’t be able
to very effectively improve your score because you won’t
understand how the things you do in daily life affect your
score.
If
you don’t understand how your credit score works, you will
also be at the mercy of any company that tries to tell you
how you can improve your score - on their terms and at their
price.
In
general, your credit score is a number that lets lenders
know how much of a credit risk you are. The credit score
is a number, usually between 300 and 850, that lets lenders
know how well you are paying off your debts and how much
of a credit risk you are.
In
general, the higher your credit score, the better credit
risk you make and the more likely you are to be given credit
at great rates. Scores in the low 600s and below will often
give you trouble in finding credit, while scores of 720 and
above will generally give you the best interest rates out
there. However, credit scores are a lot like GPAs or SAT
scores from college days - while they give others a quick
snapshot of how you are doing, they are interpreted by people
in different ways. Some lenders put more emphasis on credit
scores than others.
Some
lenders will work with you if you have credit scores in the
600s, while others offer their best rates only to those creditors
with very high scores indeed. Some lenders will look at your
entire credit report while others will accept or reject your
loan application based solely on your credit score.
The
credit score is based on your credit report, which contains
a history of your past debts and repayments. Credit bureaus
use computers and mathematical calculations to arrive at
a credit score from the information contained in your credit
report.
Each
credit bureau uses different methods to do this (which is
why you will have different scores with different companies)
but most credit bureaus use the FICO system. FICO is an acronym
for the credit score calculating software offered by Fair
Isaac Corporation company. This is by far the most used software
since the Fair Isaac Corporation developed the credit score
model used by many in the financial industry and is still
considered one of the leaders in the field.
In
fact, credit scores are sometimes called FICO scores or FICO
ratings, although it is important to understand that your
score may be tabulated using different software.
One
other thing you may want to understand about the software
and mathematics that goes into your credit score is the fact
that the math used by the software is based on research and
comparative mathematics. This is an important and simple
concept that can help you understand how to boost your credit
score. In simple terms, what this means is that your credit
score is in a way calculated on the same principles as your
insurance premiums.
Your
insurance company likely asks you questions about your health,
your lifestyle choices (such as whether you are a smoker)
because these bits of information can tell the insurance
company how much of a risk you are and how likely you are
to make large claims later on. This is based on research.
Studies
have shown, for example, that smokers tend to be more prone
to serious illnesses and so require more medical attention.
If you are a smoker, you may face higher insurance premiums
because of this.
Similarly,
credit bureaus and lenders often look at general patterns.
Since people with too many debts tend not to have great rates
of repayment, your credit score may suffer if you have too
many debts, for example. Understanding this can help you
in two ways:
1)
It will let you see that your credit score is not a personal
reflection of how “good” or “bad” you are with money. Rather,
it is a reflection of how well lenders and companies think
you will repay your bills - based on information gathered
from studying other people.
2)
It will let you see that if you want to improve your credit
score, you need to work on becoming the sort of debtor that
studies have shown tends to repay their bills. You do not
have to work hard to reinvent yourself financially and you
do not have to start making much more money. You just need
to be a reliable lender. This realization alone should help
make credit repair far less stressful!
Credit
reports are put together by credit bureaus, which use information
from client companies. It works like this: credit bureaus
have clients - such as credit card companies and utility
companies, to name just two - who provide them with information.
Once
a file is begun on you (i.e. once you open a bank account
or have bills to pay) then information about you is stored
on the record. If you are late paying a bill, the clients
call the credit bureaus and note this. Any unpaid bills,
overdue bills or other problems with credit count as “dings”
on your credit report and affect your score.
Information
such as what type of debt you have, how much debt you have,
how regularly you pay your bills on time, and your credit
accounts are all information that is used to calculate your
credit score.
Your
age, sex, and income do not count towards your credit score.
The actual formula used by credit bureaus to calculate credit
scores is a well-kept secret, but it is known that recent
account activity, debts, length of credit, unpaid accounts,
and types of credit are among the things that count the most
in tabulating credit scores from a credit report.
 
> Home > Improve
Your Credit Score: Main Page
Related
Channels:
|
