Credit Score
By Vishy Dadsetan, Thu Dec 8th
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Don't get excited guys, this is not that kind of score and itsimpact lasts much longer than 30 seconds. We are talking aboutcredit scoring and that is also known as FICO (FairIsaac & Co.) score.
So what is credit scoring? You have heard of personalityprofile that dating services use to find the best match betweenpeople. Well, credit scoring is a mathematically calculatedfinancial profile lenders use to match applicants with loans.Credit scoring is a way for lenders to determine how much riskis involved in lending money to you and based on that risk theymay decide not to lend money to you at all or change the termsof the loans to match the risk.
Who uses credit scoring? Credit scoring has been aroundfor ever, that is since 1950s, and it was first used for issuingcredit cards and auto loans. Now all sort of creditors includinghome mortgage lenders use it. But they also consider otherfactors such as your salary, your employment and yourassets.
So what's in a creditscore? Pick a number, any number between 300 and 850.That would probably be someone's also known as FICO(Fair Isaac & Co.) score. In the eyes of potential creditors,scores closer to 850 indicate more credit worthiness, which inturn comforts these skittish creditors that you are more likelyto pay your loan than a person with lower credit score.
The following are an interpretation of what various FICO scoreranges mean.
* Excellent: Over 750
* Very Good: 720 to 750
* Acceptable: 660 to 720
* Uncertain: 620 to 660
* Risky: less than 620
What impacts my FICOScore? This number is a relative number andas much as possible objective. By relative I mean that itcompares your financial habits with others in similar situation.The first step is gathering information about how you treatmoney, do you pay your bills on time, how many credit accountsyou have, what type, do you have any collection action againstan account, how much total debt you have, and a bunch of otherdata.
Then the objective part kicks in by using mathematicalcalculation that do not care about how you look, what religionyou have, etc. The lenders only want to know how likely you areto pay their money back in a timely manner and without hasslingthem.
The FICO score calculations consider the following factors:
Your payment history 35% : Do you pay your bills on time? Haveyou ever been delinquent, or are you consistently late? Howabout collection notices and bankruptcy? The answer to thesequestions account for about 35% of your credit score.
Total debt : How much do you owe lenders compare to the totalamount you can borrow impacts about 30% of your credit score. Ifyour credit cards are close to being maxed out, it may indicatelooming financial problems and a possibility of default and itdrops your credit score.
Length of credit history: Approximately 15% of your credit scorecalculation depends on how long you have had your accounts?Three days, six months, ten years? The longer credit history hasa positive impact on your credit score.
Taking on more debt: Are you taking on more new debts? Evenapplying for too many new cards too quickly may be considered asfinancial difficulty and impacts your in a negativeway. This builds about 10% of your credit score.
Types of credit in use: About 10% of your dependson the type of credit mix you have. High ratio of credit cardsand installments loans in relationship to mortgages has anegative impact on your credit score.
Why do I need to check my credit report from each majorcredit bureau?
Despite normalization of credit scoring system that gives creditscores about the same value at all major credit bureaus, theinformation reported to these bureaus are not identical. So, onecredit bureau may receive information that impacts your creditscoring one way and another credit bureau receives another setof information that impacts your credit scoring in anotherway.
The good news is that as of September 1, 2005, as an American,you can ask for a free credit report from each of the majornationwide consumer reporting companies once every 12months.
Four simple tips to improve your creditscore:
* Pay your bills on time, especially your mortgage and yourinstallment loans.
* Borrow below your credit limits and do not max out your creditcards.
* Carry two or three credit cards only.
* Don't apply for several credit cards at one time.
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