What Is Credit and Why Should I Care?
1) Credit scoring is a method used by many to help decide whether or not you are credit worthy and to determine your credit risk. The scoring system is used for the following reasons:
• Compares information in your credit report to the performance of consumers who have similar credit characteristics
• Examines many credit characteristics, including your payment history, the number and kind of accounts you have, the number and frequency of late payments, and any collections or bankruptcies
Generally speaking, positive credit characteristics make your score higher and help you to qualify for better loans. Negative characteristics make your score lower and may interfere with your ability to quality for the best loan terms. How is a credit-scoring model developed?
2) A credit-scoring model is developed by using several criteria, including some of the following:
• Selecting a large sampling of customers
• Analyzing the data in their credit reports to determine which factors relate to creditworthiness
• Assigning a degree of importance to each of the factors, based on how accurate a predictor it is in determining who will repay their loan on time
3) Who cares about my credit score?
• Banks & Lenders
• Landlords
• Employers
• Retail companies
• Insurance companies
• Cell phone companies
• Utility companies
4) What is a "good" credit score?
There are several types of credit scores available. Typically, the higher the score, the better. Each lender decides what credit score range it considers to be a good credit risk or a poor credit risk. For this reason, the lender is the best source to explain what your credit score means in relation to the final credit decision. After all, they determine the criteria used to extend credit. The credit score is only one component of information evaluated by lenders.
5) What factors influence my credit score?
Various factors determine your credit score, including the following:
• Payment history
• Outstanding debt
• Length of credit history
• Severity and frequency of derogatory credit information such as bankruptcies, charge-offs, and collections
• The amount of credit used compared to the credit available
6) How does my credit score affect me?
Your credit score is an important indicator of your financial health. Lenders use credit scores to determine:
• Whether or not you are a good candidate for a loan
• What type of interest rate you will pay
While your credit score is a key determinant of your creditworthiness, lenders also examine the information on your credit repot and your loan application. Regularly checking your credit report enables you to:
• Be informed of the most up-to-date information in your credit history
• Correct any inaccuracies, to make sure that your credit data is a true depiction of your credit record and increasing your chances of receiving credit under the best possible terms
7) Why does my credit score change from time to time?
The credit bureaus calculate your credit score based on the information contained in your credit file. As your credit history changes, your credit score will also change. Some creditors only report information to certain bureaus and not to others, which will also cause the changes in the scores. In addition to the reporting variations, the information reported whether good or bad will impact your score. For instance, if you pay down a revolving account, your score may increase. However, on the other hand, if you are more than 30 days late, you may have a decrease in your score. Remember activity, whether good or bad, has an affect on your credit score, so stay committed to the good stuff!
8) When do the bureaus update credit scores update?
As a general rule, credit scores are updated on a monthly basis for the preceding month and should be available to view after the first of the month. The score provided is based on the information in your credit report for the previous month. It is also important to note that your score may be different at each of the three main credit reporting agencies. The credit score from each credit reporting agency considers only the data in your credit report at that agency. If your current scores from the three credit reporting agencies are different, it's probably because the information those agencies have on you differs. Although creditors report once a month to the bureaus, information can be updated at any time during the month through either Rapid Rescore or by contacting the bureaus directly. Rapid Rescore is a process by which verifiable information is updated with the bureaus within 3-5 business days. This is a great program for clients that need to have their scores improved quickly and cannot wait until the next reporting cycle.
9) Who are the credit bureaus?
• Equifax - Beacon Score Model
• Experian - Fair Isaac Model Score
• TransUnion - Fico Classic Score Model
10) The Bureau's Mistake
The credit bureaus are respositories and do not actually own debt. Therefore, the information is provided by the reporting creditor and can be inaccurate. According to PIRG Public Information Research Group, the following mistakes have been found on consumer credit reports:
• 29% of credit reports contain serious errors, false delinquencies, or accounts that did not belong to the consumer
• 41% of credit reports contain demographic information that was misspelled, outdated or incorrect
• 20% of credit reports were missing major credit, loan, mortgage or other information to demonstrate the credit worthiness of the consumer
• 26% of credit reports contain accounts that were closed by the consumer but incorrectly listed as open (or) “closed by credit grantor”
• Altogether, 70% of credit reports contain errors or mistakes
