What is behind the Credit Score?
Credit scores have few tricky algorithms and number crunching that you should know about. Learn how your credit report is evaluated and how to improve your TransUnion, Equifax and Experian credit scores. Lets get started!
History of credit scoring system!
The credit scoring system became prevalent during the 1980's as a way for lenders to quickly evaluate a potential borrower's creditworthiness. The system was found to accurately predict financial risk over time and grew to several different industries. Now credit scoring is used by lenders, insurers, landlords, employers, utility companies and even judges to evaluate your credit behavior.
The math...
Thousands of different credit scoring formulas exist today for various evaluation purposes. Each unique credit scoring system is accurate and correct for its own application. The credit scores you can order online use an algorithm created for consumers that approximates these different formulas. Your online credit scores may vary a bit from the score your lender uses, but they should be in the same range.
The chemistry...
The basic credit scoring formula takes into account several factors from your credit report. The impact of each element fluctuates based your own credit profile:
* Payment history – A good record of on-time payments will help boost your credit score.
* Outstanding debt – High balances in relation to your credit limits will harm your credit. Aim for balances under 35%.
* Credit account history – An established credit history makes you a less risky borrower. Think twice before closing old accounts before a loan application.
* Recent inquiries – When a lender or business checks your credit, it causes a hard inquiry and a slight ding to your credit score. Apply for new credit in moderation.
* Types of credit – A healthy credit profile has a balanced mix of credit accounts and loans.
The Economics...
When you are preparing for a major purchase make sure you check your credit scores and credit reports from all three credit reporting agencies: TransUnion, Equifax and Experian. Looking at your scores and reports a few months before your loan application will help you get a complete picture of your credit health. Worried if your credit score makes the grade? If your credit score is above 650 you will probably qualify for a standard loan. Under 650, you may have trouble receiving new credit.
If your credit score is a little low, pay your bills on time, reduce your debt, remove inaccuracies and avoid new inquiries for a few months to give it a boost. Plus, don't forget that your credit score is not the only factor a lender may look at when they are evaluating your financial standing.
