Credit Scoring.

What causes a lender to decide if they should give you that credit card or a loan? Your Credit Score. Creditors use Credit Scoring to decide if you are a person who is safe to lend money to or risky. The Credit Score directly determines if you get that car loan, or how much interest you will pay on that mortgage you want. Therefore, your Credit Score is quite an important piece financial information.

What are Credit Scoring systems?

Credit Scoring systems are a way that creditors decide if you should recieve credit, and how much interest to charge.

Credit Scoring systems keep a good deal of information about you. They track your current address and employment. Your past payment of bills, loans and credit cards. This information on your credit score contains information on late payments, collection actions, number of credit applications you have filled out, and your outstanding debt. With all this information, your credit score is calculated by measuring your information against people with similar histories, and you are given a credit score. The credit score itself (also reffered to as a FICO score) is a number from 300 to 850. This credit score is an indication of how likely you are to pay off your debts - in a word, how "risky" you are to the money lenders. The higher your number, the more likely they are to lend to you, and the lower your interest rates are likely to be.

Your credit score is a small component of your credit report, but it is always the first thing that creditors look at. It is very important to have accurate information on your credit report. If the information is inaccurate, it will refect badly on your credit score. To check your credit score and credit report, you can sign up for a free:

Online Credit Score

Why is there a credit score?

Your Credit Score is an easy way for lenders to tell immediately if they should lend to you or not. Your Credit Score also determines if your interest on the borrowed capital will be high or low. The Credit Scoring System itself is a statistical analysis based on probablities and statistics. Since it is a formula, it is not "personal" in any way - thus your Credit Score is actually an excellent reflection of your acutal credit worthiness.

How are credit scores created?

To create Credit Scores, creditors randomly take a sample of cusomers, and analyze them to see who is credit worthy. This analysis is statistically based and the outcome is determined by computer. The as different levels of people have different likelyhoods of paying their credit off on time, they are separated out into different levels. Each person in each of these levels is assigned a Credit Score. The only information collected for these ratings about you as an individual are your age, occupation and where you live. It is not legal to use anything such as sex, race, marial status etc. in generating the results.

How can I increase my Credit Score?

The first step in dealing with your Credit Score is to know what is is - get your full Credit Report:

Free Online Credit Score

Once you have it, take a look at your score. If it is under 620, then you have a low Credit Score. If it is between 620 and 700 you are in the average range. If your score is higher than 720, you are in the excellent range, you will get most loans, and very favorable interest rates on those loans.

Now, if your Credit Score is above 800, there is not much point in working to improve it - once your Credit Score is above 800, it is nearly impossible to bring it up much more, and at this point, you are already in the best Credit Score bracket you can be. However, few people actually have a score above 800. Likely, you are one of them. Read on.

The most important factor to improving your Credit Score is to pay your bills on time. A full 35% of your Credit Score is derived from how you pay your bills. Also, the history of past bill payments is retained as well, so make it a habit to always pay your bills on time. If you have a few bills over 30 days late, this should not effect your Credit Score too much - but if they have gone 60, 90 or worse - to collection. This can signifigantly detract from your credit score. One or two marks of this kind can have a signifigant negative impact.

The next is how much debt do you have? If you have $20,000 worth of avaliable credit (say, in credit cards) and you are only using $4,000 worth of that, then you are using 20% of your total credit. This is actually better than only having $1000 worth of credit, and owing $1000. In this case, you are using 100% of your total credit - even if it is less money.

The next determinant in your Credit Score is your credit history length. The longer the better. There is not much you can do to affect this, but it can help to not cut up old credit cards when trying to improve your credit score. If you get a new credit card, and you cancel your old credit cards, you are also cancelling your credit history of the older cards. You are better off to put the cards away (balance paid off!) where you cannot use them, and they can maintain their history.

Now, this does not apply if you have too many credit card accounts however, in this case it is wise to get rid of a number if you have over 3 or 4 cards. The reason this creates a negative on your Credit Score is that anyone looking to lend you money realizes that you have a large amount of easially available credit that you can dig into at any time. Should you dig into this, you will more than likely have difficulty paying off your new loan or mortgage.

So, taking all the above into account, to increase your Credit Score, pay your bills on time, pay down any outstanding balances you have, and stop taking on new debts. It is worth noting that once you have taken these steps, it will take time to increase your Credit Score, after you have initated this process you should check your Credit Score again in a year.

How accurate is this Credit Score?

Your Credit Score can vary a bit by who is providing the score (which agency provides the results to your creditor). This system is designed to be as impartal as possible, and surprisingly it is generally quite accurate. The real difference in the Credit Score comes down to when you are discussing the loan or mortgage with your agent on the other side of the table. They are given some leeway in how much interest, or, even if they should give you the loan. For this reason, when sitting down to negotiate, your Credit Score only gets you in the door. How you present yourself to the lender is a large factor on the terms or acceptance of credit.

One thing you can do to assist with this, print out your full Credit Report, your Credit Score will generlly be in large numbers on the top. Bring it with you to the lender, and show them you know what your Credit Score is. Very few people are actually aware of their credit score, and, if you bring yours with you and show that you are prepared, this can go a long way to getting you the loan you want. Also, if you are shopping around for a mortgage, some lenders will use your carried in Credit Score to perform their calculations - they don't need to check your credit score, you brought it with you! (They still will check before the final loan however.) The advantage of this is that if you are shopping around, each time you have your credit checked by a lender, it actually decreases your Credit Score by a tiny amount. A few checks are fine, but a larger number could have a slight negative impact, and if you are reading this, you likely want to avoid that.

Check your credit score!