You need to know how credit scoring and your credit report works to get out of debt and improve your financial future. Here is what you need to know.
You may be wondering how some people can walk into lending institution and get credit, or loans, while others that have the same income or job seem to get turned down or receive a higher interest rate. It is all about the risk factor and whether you are a safe risk, or a bad one, when you are being loaned money.
Creditors use a credit scoring system that gives them an idea of whether the person who wants to borrow money is likely to make their repayments, either they have a history of not making repayments, or are likely to be unable to make the monthly repayments.
These credit scoring systems may go under several names. One of the most widely known credit scoring software applications is the FICO, or the Fair Isaac Corporation, and there are three variations of this software used by the three major credit reporting agencies.
What Exactly Is Credit Scoring?
Credit scoring is collected information about you and your credit history. Contained in a credit report is your bill paying history, as well as how many accounts that you already hold and what type they are. Things such as late payments, any collection actions taken against you, outstanding debts and how long you have had accounts are all considered. All of this information is compared with other consumers that fit the same profile as you to determine the type of risk that you are to the creditor.
The credit scoring system gives you points for each factor and the end result tells the creditor if you are likely to repay your debts. The total amount of your debt is then added up to give you a credit score. Your credit score is an indication on how likely you are to repay your debts and make your monthly repayments when they are due.
Find Out What's in Your Credit Report First
Since you now know that everything in your credit report is vital to whatever you are going to get the line of credit that you are applying for, it would make sense to get your credit report and take a look at what is in it.
Sometimes credit reporting agencies can make mistakes or place something on your report that is inaccurate. By checking your credit records for yourself, you can make sure that everything contained in it is true and accurate.
Before applying for anything, make sure that you obtain your credit report. An amendment in the federal fair credit reporting act now allows a consumer the opportunity to receive a free credit report when you request it, or at least each year.
You obtain your financial summary making a request to one or all of the major credit reporting agencies.
Read through your report and make sure that everything is accurate and you are happy with what has been included in the document. By reading through your report, you will also be able to see if there are good things or bad things listed on your report. This will have a bearing on whether you are likely to be given credit.
Why Credit Scoring Is Used, And Is It Fair?
Credit scoring is based on real information and statistics rather than the personal judgments of another person. Because of this, there is no variation in acceptance of a loan based on other things that are not statistically based facts. Different creditors often use different types of scoring models from agency to agency. Also, different models of the system are used for different lines of credit.
Under the equal credit opportunity act, no screening systems are allowed to use race, sex, religion, marital status or a person's country of origin to determine an individuals creditworthiness. Age is sometimes allowed as a scoring characteristic as long as the system is properly designed and those that are over a certain age are treated fairly and given the same opportunities as younger applicants.
If you are not given credit, or your application is denied, the creditor must provide you with the reasons why your application was rejected, either by notification, or by you asking the creditor within two months of being denied. A creditor must also give you a fair reason by law. The credit report system has been designed to make sure that creditors are as fair and objective as possible with those who are applying for financial assistance.
How To Improve Your Credit Score
Credit score criterion can differ between creditors, but there are a few fundamentals that can be used to make sure that your credit is in good shape. These include things like:
-Paying your bills on time: Because your history is always taken into account when a credit score is determined, you can improve chances of acceptance by making sure that you have good statistics on paying bills and previous repayments.
-Evaluate your debts: Calculate your outstanding debts and compare them to your existing credit limits. If you are almost at capacity, consider reducing some of your debt before applying for more credit.
-What is your credit history: How long you have had a credit history is also important. If you have not had one for long, it can still work in your favor by having all of your payments made on time and low balances on your already existing credit.
-Have you made a lot of inquiries lately? This can have an effect on how your score is determined. Try to avoid applying for too many accounts, or lines of credit in a short time.
The best way to keep a good credit score, or start repairing your records, is to pay your bills on time and try to reduce some of the debt that you already have.
If you have damaged your credit score , it will take some time and perseverance, but, you will be able to repair your credit rating as they are updated and subject to change over time with new information that is contained in your credit reports.