Get Your Credit Score To Soar In The Twinkling Of An Eye
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Ever wonder how a creditor decides whether togrant you credit? For years, creditors have been using credit scoringsystems to determine if you'd be a good risk for credit cards and autoloans. More recently, credit scoring has been used to help creditorsevaluate your ability to repay home mortgage loans. Here's how creditscoring works in helping decide who gets credit -- and why.
What is credit scoring?
Credit scoring is a system creditors use to help determine whether togive you credit.
Information about you and your credit experiences, such as yourbill-paying history, the number and type of accounts you have, latepayments, collection actions, outstanding debt, and the age of youraccounts, is collected from your credit application and your creditreport. Using a statistical program, creditors compare this informationto the credit performance of consumers with similar profiles. A creditscoring system awards points for each factor that helps predict who ismost likely to repay a debt. A total number of points -- a credit score-- helps predict how creditworthy you are, that is, how likely it isthat you will repay a loan and make the payments when due.
Because your credit report is an important part of many creditscoring systems, it is very important to make sure it's accurate beforeyou submit a credit application. To get copies of your report, contactthe three major credit reporting agencies:
- Equifax: (800) 685-1111
- Experian (formerly TRW): (888) EXPERIAN (397-3742)
- Trans Union: (800) 916-8800
These agencies may charge you up to $9.00for your credit report.
Why is credit scoringused?
Credit scoring is based on real data and statistics, so it usually ismore reliable than subjective or judgmental methods. It treats allapplicants objectively. Judgmental methods typically rely on criteriathat are not systematically tested and can vary when applied bydifferent individuals.
How is a credit scoringmodel developed?
To develop a 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 it statistically to identify characteristics that relate tocreditworthiness. Then, each of these factors is assigned a weight basedon how strong a predictor it is of who would be a good credit risk. Eachcreditor may use its own credit scoring model, different scoring modelsfor different types of credit, or a generic model developed by a creditscoring company.
Under the Equal Credit Opportunity Act, a credit scoring system maynot use certain characteristics like -- race, sex, marital status,national origin, or religion -- as factors. However, creditors areallowed to use age in properly designed scoring systems. But any scoringsystem that includes age must give equal treatment to elderlyapplicants.
What can I do to improvemy score?
Credit scoring models are complex and often vary among creditors and fordifferent types of credit. If one factor changes, your score may change-- but improvement generally depends on how that factor relates to otherfactors considered by the model. Only the creditor can explain whatmight improve your score under the particular model used to evaluateyour credit application.
Nevertheless, scoring models generally evaluate the following typesof information in your credit report:
- Have you paid your bills on time? Payment history typically is asignificant factor. It is likely that your score will be affected negativelyif you have paid bills late, had an account referred to collections, ordeclared bankruptcy, if that history is reflected on your credit report.
- What is your outstanding debt? Many scoring models evaluate theamount of debt you have compared to your credit limits. If the amount youowe is close to your credit limit, that is likely to have a negative effecton your score.
- How long is your credit history? Generally, models consider thelength of your credit track record. An insufficient credit history may havean effect on your score, but that can be offset by other factors, such astimely payments and low balances.
- Have you applied for new credit recently? Many scoring modelsconsider whether you have applied for credit recently by looking at"inquiries" on your credit report when you apply for credit. Ifyou have applied for too many new accounts recently, that may negativelyaffect your score. However, not all inquiries are counted. Inquiries bycreditors who are monitoring your account or looking at credit reports tomake "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 manycredit 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 scoring models, loans from finance companies may negativelyaffect your credit score.
Scoring models may be based on more than just information in yourcredit report. For example, the model may consider information from yourcredit application as well: your job or occupation, length ofemployment, or whether you own a home.
To improve your credit score under most models, concentrateon paying your bills on time, paying down outstanding balances, and nottaking on new debt. It's likely to take some time to improve your scoresignificantly.
How reliable is thecredit scoring system?
Credit scoring systems enable creditors to evaluate millions ofapplicants consistently and impartially on many differentcharacteristics. But to be statistically valid, credit scoring systemsmust be based on a big enough sample. Remember that these systemsgenerally vary from creditor to creditor.
Although you may think such a system is arbitrary or impersonal, itcan help make decisions faster, more accurately, and more impartiallythan individuals when it is properly designed. And many creditors designtheir systems so that in marginal cases, applicants whose scores are nothigh enough to pass easily or are low enough to fail absolutely arereferred to a credit manager who decides whether the company or lenderwill extend credit. This may allow for discussion and negotiationbetween the credit manager and the consumer.
What happens if you aredenied credit or don't get the terms you want?
If you are denied credit, the Equal Credit Opportunity Act requires thatthe creditor give you a notice that tells you the specific reasons yourapplication was rejected or the fact that you have the right to learnthe reasons if you ask within 60 days. Indefinite and vague reasons fordenial are illegal, so ask the creditor to be specific. Acceptablereasons include: "Your income was low" or "You haven'tbeen employed long enough." Unacceptable reasons include: "Youdidn't meet our minimum standards" or "You didn't receiveenough points on our credit scoring system."
If a creditor says you were denied credit because you are too nearyour credit limits on your charge cards or you have too many credit cardaccounts, you may want to reapply after paying down your balances orclosing some accounts. Credit scoring systems consider updatedinformation and change over time.
Sometimes you can be denied credit because of information from acredit report. If so, the Fair Credit Reporting Act requires thecreditor to give you the name, address and phone number of the creditreporting agency that supplied the information. You should contact thatagency to find out what your report said. This information is free ifyou request it within 60 days of being turned down for credit. Thecredit reporting agency can tell you what's in your report, but only thecreditor can tell you why your application was denied.
If you've been denied credit, or didn't get the rate or credit termsyou want, ask the creditor if a credit scoring system was used. If so,ask what characteristics or factors were used in that system, and thebest ways to improve your application. If you get credit, ask thecreditor whether you are getting the best rate and terms available and,if not, why. If you are not offered the best rate available because ofinaccuracies in your credit report, be sure to dispute the inaccurateinformation in your credit report.
© Copyright - www.deleteuglycredit.com
Omar M. Omar is the owner of http://www.deleteuglycredit.comand - Author of "TheCredit Repair Bible" book. The website is dedicated to providing creditconsumers free advice on how to repaircredit. It also provides credit consumers numerous information about theircredit report, credit laws, and their rights as a consumer.
Youhave permission to publish this article electronically or in print, in yourNewsletter, on your website, or in your E-Book, as long as the author's ResourceBox is included with the article.
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