How do creditors decide whether to grant you credit or not? Creditors have been using the credit scoring system for credit report scoring for years to determine if you are a good person for credit cards and auto loans. More recently however, credit scoring has been used to help creditors evaluate your ability to repay home mortgage loans. So, what is credit score? Who does the determining credit score? How do I get the best credit score? Let's find out.
WHAT IS CREDIT SCORING?
Credit scoring is a system creditors us to help determine whether to give you credit. Credit scoring systems give information about you and your past credit experiences. Credit scoring will tell how well you pay your bills such as home mortgage, car payment, and utilities. This credit scoring is recorded for all creditors to see. This is known as your paying history. Credit scoring systems take into account the number of accounts you have as well as the type of account that it is. Credit scoring systems list whether you have been late with your payments or if the account has been turned over for collections. Credit scoring systems list your current balances as well as your maximum charge amount. All of this information is known as a credit report. Using a statistical program, creditors compare this information to the credit performance of consumers with similar profiles. A credit scoring system awards points for each factor that helps predict how credit worthy you are, how likely it is that you will repay a loan and make the payments on time.
A credit report scoring takes your credit report and uses this information for credit scoring. It is a very important part of the credit scoring system. This is why it is very important to make sure that this report is accurate before you submit a credit application. A bad credit score will get you denied on credit. To get copies of your credit score and your credit report, you can contact the three major credit reporting agencies. They are:
Equifax- 1-800-685-1111
Experian- 1-888-EXPERIAN (397-3742)
Trans Union- 1-800-916-8800
These agencies may charge you up to $9 for your credit report. If you request your credit score fico, they can charge additional amounts. Each creditor has it's own separate fees. You can also obtain all three credit bureaus online and receive online credit score.
HOW IS A CREDIT SCORING MODEL DEVELOPED?
To develop a credit scoring model, a creditor selects a random sample of its customers or a sample of similar customers if their sample is not large enough and analyzes the information statistically to identify characteristics that relate to creditworthiness. Then each of these factors are assigned a weight based on how strong a predictor it is of who would be a good credit risk. Each creditor may use its own credit scoring model, different scoring models for different types of credit, or a generic model developed by a credit scoring company.
Under the Equal Credit Opportunity Act, a credit scoring system may not use certain characteristics-like race, sex, marital status, national origin, or religion-as factors. However, creditors are allowed to use age in properly designed credit scoring systems. But any credit scoring system that includes age must give equal treatment to elderly applicants.
WHY IS CREDIT SCORING USED?
Credit scoring systems use credit scoring based on real data and statistics, so it usually is more reliable than subjective or judgmental methods. Credit scoring keeps all applicants objectively. Judgmental methods typically rely on criteria that are not systematically tested and can vary when applied by different individuals.
WHAT CAN I DO TO IMPROVE MY SCORE?
Credit scoring system models are complex and often vary among creditors and for different types of credit. If one factor changes, your credit score may change-but improvement generally depends on how that factor relates to other factors considered by the model. Only the creditor can explain what might improve your credit score under the particular model used to evaluate your credit application. To obtain the best credit score, this will determine how the next few questions are answered.
Nevertheless, credit scoring system models generally evaluate the following types of information in your credit report:
· Have you paid your bills on time? Payment history typically is a significant factor. It is likely that your score will be affected negatively if you have paid bills late, had an account referred to collections, or declared bankruptcy, if that history is reflected on your credit report.
· What is your outstanding debt? Many scoring models evaluate the amount of debt you have compared to your credit limits. If the amount you owe is close to your credit limit, this is likely to have a negative effect on your score.
· How long is your credit history? Generally, models consider the length of your credit track record. An insufficient credit history may have an effect on your score, but that can be offset by other factors, such as timely payments and low balances.
· Have you applied for new credit recently? Many credit scoring system models consider whether you have applied for credit recently by looking at "inquiries" on your credit report when you apply for credit. If you have applied for too many new accounts recently, this may negatively affect your score. However, not all inquiries are counted. Inquiries by creditors who are monitoring your account or looking at credit reports to make "prescreened" credit offers are not counted.
· How many and what types of credit accounts do you have? Although it is generally good to have established credit accounts, too many credit card accounts may have a negative effect on your score. In addition, many models consider the type of credit accounts you have. For example, under some credit scoring systems models, loans from finance companies may negatively affect your credit score.
Credit scoring systems models may be based on more than just information in your credit report. For example, the credit scoring system model may consider information from your credit application as well: your job or occupation, length of employment, or whether you own a home.
To get the best credit score or improve your credit score under most models, concentrate on paying your bills on time, paying down outstanding balances, and not taking on new debt. It's likely to take some time to improve your score significantly.
HOW RELIABLE IS THE CREDIT SCORING SYSTEM?
Credit scoring systems enable creditors to evaluate millions of applicants consistently and impartially on many different characteristics. But to be statistically valid, credit scoring systems must be based on a big enough sample. Remember that these credit scoring systems generally vary from creditor to creditor.
Although you may think such a credit scoring system is arbitrary or impersonal, it can help make decisions faster, more accurately, and more impartially than individuals when it is properly designed. Many creditors design their credit scoring systems so that in marginal cases, applicants whose scores are not high enough to pass easily or are low enough to fail absolutely are referred to a credit manager who decides whether the company or lender will extend credit. This may allow for discussion and negotiation between the credit manager and the consumer.
WHAT HAPPENS IF I AM DENIED CREDIT OR DON'T GET THE TERMS I WANT?
If you are denied credit because you were given a bad credit score, the Equal Credit Opportunity Act requires that the creditor give you a notice that tells you the specific reasons your application was rejected or the fact that you have the right to learn the reasons if you ask within 60 days. Indefinite and vague reasons for denial are illegal, so ask the creditor to be specific. Acceptable reasons include: "Your income was low" or "You haven't been employed long enough." Unacceptable reasons include: "You didn't meet our minimum standards" or "You didn't receive enough points on our credit scoring system."
If a creditor says you were denied credit because you are too near your credit limits on your charge cards or you have too many credit card accounts, you may want to reapply after paying down your balances of closing some accounts. Credit scoring systems consider updated information and change over time. This will greatly improve a bad credit score.
Sometimes you can be denied credit because of information from a credit report. If so, the Fair Credit Reporting Act requires the creditor to give you the name, address, and phone number of the credit reporting agency that supplied the information. You should contact that agency to find out what your report said. This information is free if you request it within 60 days of being turned down for credit. The credit reporting agency can tell you what's in your report, but only the creditor can tell you why your application was denied.
If you've been denied credit, or didn't get the rate or credit terms you want, ask the creditor if a credit scoring system was used. If so, ask what characteristics or factors were used in that system, and the best ways to improve your application. If you get credit, ask the creditor whether you are getting the best rate and terms available and, if not, why. If you are not offered the best rate available because of inaccuracies in your credit report, be sure to dispute the inaccurate information in your credit report.
Credit scoring systems are designed to help creditors determine if you are a risky client or a good client. A bad credit score will tell the creditor immediately whether to say yea or nay. You can go to the Debtkiller.com link below and learn how to get all 3 of your credit reports for FREE! Then see what your credit score fico is and whether you have the best credit score or bad credit score.
This and many other helpful consumer articles may be found at www.debtkiller.com or by reviewing Janna's many regular personal financial updates at her blog, http://jannajones.blogspot.com.
