Most people know that our credit reports have a lot of information about our
borrowing history. How credit worthy we are - how likely we are to pay off our
debts (on time or not) - is also looked at as an indicator of how people are likely to
behave in other areas.
Employers rely on credit reports to see if we'll be good employees. Landlords
pull credit reports to see if we'll be reliable tenants. Auto insurers rely on credit
information when deciding what sort of an insurance risk we are. But for years there's
been a piece of the credit report the average consumer has been unable to see.
YOUR CREDIT REPORT & SCORE
It's called a credit risk score - and if you have a credit rating you have one.
The scores range from 300 to 850, with a higher score being better than a lower one.
Fair Isaac, which is the country's pre-eminent producer of credit scores, takes
information from your credit report, gives different weights to different pieces of that
information and how long ago those things occurred, and comes up with a number for
you. Then when a lender is trying to decide whether or not to give you a mortgage,
for example, or what rate of interest to charge on your loan, the score is one important
factor they consider when making a decision.
DO MOST LENDERS CONSIDER THESE SCORES?
At least 75 percent of home loans are approved with help from - as they're
called in the industry - FICO (Fair Isaac and Co.) risk scores. A review of the 100
largest financial institutions in the USA shows that 70 percent use FICO scores. FICO
scores play a major role in the marketplace.
HOW DO AVERAGE PEOPLE SCORE?
Pretty good considering that we see bankruptcies in the headlines so often
today. The average score is about 720 on a scale of 350 to 850.
Below that (720), you may have some problems applying for credit. 20% of
people score below 620. Since this group includes about 50% of all people who
default on their mortgages, lenders are very cautious about approving them for
mortgages. The next group of scores represents another 20 percent of people who,
in this instance, score between 620 and 690. A score in this 70 point range may not
stop you from getting credit, but lenders are going to require greater scrutiny of
applicants and may require additional assurances of ability to manage a proposed
mortgage. In addition, Fannie Mae and Freddie Mac (buyers of mortgages for the
secondary market) may require that lenders probe for more information to understand
why there's been a problem before they agree to make a loan. On the high end,
any score above 780 is considered elite. About 1-2% of borrowers score in the 800s.
There are a several factors that make a big difference in your score. Let's
Review some of them and see how you can make changes to improve your scores:
-The record of your bill paying (This accounts for 35 percent of your score). We
all know we should pay bills on time. If you always have, you've done well in this
category. If you slip up here and there, it can hurt your score a lot. The more recent
the errors, the more it hurts your score. Also, as in all of these categories, a record of
bad behavior is worse than one mistake. Several 30-day late payments is worse than
one 60-day late. (The way credit scoring works is to compare your habits to other
individuals who have proven to act in a positive or negative way. There are a few
different groups of patterns, so a seasoned user won't be compared to a new user.)
-How much you owe now in relation to your available credit (30% of score). The
scoring models look at how much you owe relative to how much credit you have available on
your credit accounts. The closer to maxing-out your cards and accounts, the lower you'll
score in this area. Note that owing nothing doesn't prove your ability to manage credit,
so owing a little bit is always better. For example, being at 80 percent of your credit
limit would be viewed as very high and a negative. Having your balances at 20 to 30%
percent of your maximum is just fine.
-How long you've managed credit (15 percent). This one is interesting. When
people are trying to get their credit cards under control, one of the things they do is
to make sure they don't have too many tempting cards in their wallet. But when it
comes to your credit score, you may not want to cut up the one card you've had for
the greatest length of time If you close an old and well managed account, you are
giving the scoring model the mistaken impression that your credit history is shorter
term than is really the case. It would be better to keep the older account even if it's at
a higher interest rate. Use it once or twice a year and pay it off completely rather than
cutting it up and closing it out.
-Diversity of credit type (10 percent): It's good to show that you can manage a
few different kinds of credit. Having an installment loan (on a home, car or RV) as
well as having a revolving credit account (credit card) is a positive indicator.
-Seeking new credit (10 percent): The media often exaggerate how much seeking
new credit can hurt you. Not long ago, the scoring methodology was changed to
reflect the idea that it was OK - even smart - to be shopping around for a loan. So
all of your personal inquiries into a mortgage over a 30-day period now count as only
one. That having been said, if you have real credit problems and you're regularly
shopping around for new credit cards or loans, it's going to hurt your score. Being
moderate is key. If you're out looking for credit every month, it's a minus. Less often
than that, you'll probably be okay.
Now that you that you know some of the major scoring factors you may use the
information to either continue your already good credit or to start to improve items on
your credit report that can have a major effect on improving your scores. After you
get your credit report, you may use it to open up discussions with lenders in a
preliminary way. You might address a mortgage broker by saying; "This is my score.
How smoothly would the mortagage process go with my score?" Then, if you need to,
you can work on your score before you apply for credit. Three to six months is a
reasonable time frame for being able to significantly improve your FICO scores.
If you go on the Web and search on "free credit score," what you'll come up
with are a number of mortgage lenders and banks who are willing to give it to you. In
some cases, you have to actually apply for a loan. There are other scores that aren't
FICO scores (even the ones that are legitimate don't have FICO's database). In other
cases, providing them with your e-mail address and phone number (so that they can
market to you later, one assumes) seems to be sufficient. So if you're willing to give
up some personal information, you can get your score for no money. Or you can pay
the $9 -$13. (Even if you're not up for checking your score, you should check your
credit report about once a year. If there are problems, you should check all three of
the credit bureaus.)
Source: http://www.ArticlePros.com/author.php?John Prentice
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