Ken Black asked:


You need to know how credit scoring and your credit report works to get out of debt and improve your financial future. Here is what you need to know.

You may be wondering how some people can walk into a lending institution and get credit, or loans, while others that have the same income or job seem to get turned down or receive a higher interest rate. It is all about the risk factor and whether you are a safe risk, or a bad one, when you are being loaned money.

Creditors use a credit scoring system that gives them an idea of whether the person who wants to borrow money is likely to make their repayments, whether they have a history of not making repayments, or are likely to be unable to make the monthly repayments.

These credit scoring systems may go under several names. One of the most widely known credit scoring software applications is the FICO, or the Fair Isaac Corporation, and there are three variations of this software used by the three major credit reporting agencies.

What Exactly Is Credit Scoring?

Credit scoring is collected information about you and your credit history. Contained in a credit report is your bill paying history, as well as how many accounts that you already hold and what type they are. Things such as late payments, any collection actions taken against you, outstanding debts and how long you have had accounts are all considered. All of this information is compared with other consumers that fit the same profile as you to determine the type of risk that you are to the creditor.

The credit scoring system gives you points for each factor and the end result tells the creditor if you are likely to repay your debts. The total amount of your debt is then added up to give you a credit score. Your credit score is an indication on how likely you are to repay your debts and make your monthly repayments when they are due.

Find Out What What’s In Your Credit Report First - since you now know that everything in your credit report is vital to whether you are going to get the line of credit that you are applying for, it would make sense to get your credit report and take a look at what is in it.

Sometimes credit reporting agencies can make mistakes or place something on your report that is inaccurate. By checking your credit records for yourself, you can make sure that everything contained in it is true and accurate.

Before applying for anything, make sure that you obtain your credit report. An amendment in the federal fair credit reporting act now allows a consumer the opportunity to receive a free credit report when you request it, or at least each year.

You obtain your financial summary making a request to one or all of the major credit reporting agencies.

Read through your report and make sure that everything is accurate and you are happy with what has been included in the document. By reading through your report, you will also be able to see if there are good things or bad things listed on your report. This will have a bearing on whether you are likely to be given credit.

Why Credit Scoring Is Used, And Is It Fair?

Credit scoring is based on real information and statistics rather than the personal judgments of another person. Because of this, there is no variation in acceptance of a loan based on other things that are not statistically based facts. Different creditors often use different types of scoring models from agency to agency. Also, different models of the system are used for different lines of credit.

Under the equal credit opportunity act, no scoring systems are allowed to use race, sex, religion, marital status or a person’s country of origin to determine an individuals creditworthiness. Age is sometimes allowed as a scoring characteristic as long as the system is designed properly and those that are over a certain age are treated fairly and given the same opportunities as younger applicants.

If you are not given credit, or your application is denied, the creditor must provide you with the reasons why your application was rejected, either by notification, or by you asking the creditor within two months of being denied. A creditor must also give you a fair reason by law. The credit report system has been designed to make sure that creditors are as fair and objective as possible with those who are applying for financial assistance.

How To Improve Your Credit Score - credit score criterion can differ between creditors, but there are a few fundamentals that can be used to make sure that your credit is in good shape. These include things like:

-Paying your bills on time: Because your history is always taken into account when a credit score is determined, you can improve chances of acceptance by making sure that you have good statistics on paying bills and previous repayments.

-Evaluate your debts: Calculate your outstanding debts and compare them to your existing credit limits. If you are almost at capacity, consider reducing some of your debt before applying for more credit.

-What is your credit history: How long you have had a credit history is also important. If you haven’t had one for long, it can still work in your favor by having all of your payments made on time and low balances on your already existing credit.

-Have you made a lot of inquiries lately? This can have an effect on how your score is determined. Try to avoid applying for too many accounts, or lines of credit in a short time.

The best way to keep a good credit score, or start repairing your records, is to pay your bills on time and try to reduce some of the debt that you already have.

If you have damaged your credit score, it will take some time and perseverance, but, you will be able to repair your credit score as they are updated and subject to change over time with new information that is contained in your credit reports.

Jim Kemish asked:


When did credit scoring begin?

All of your credit repair efforts are designed to improve your credit scores. There may be no more important number in your life. But where did credit scoring start? The FICO credit scoring model was created in the 1950s by two Stanford University researchers, Bill Fair and Earl Isaac. Automated FICO scores were first made available in 1989 and initially utilized by credit card issuers. But credit scores really became part of all of our lives in 1995 when Fannie Mae and Freddie Mac, the mortgage giants, asked lenders to incorporate the use of FICO credit scores in their approval decisions. The rest is history. Fair Isaac Corp. trades on the New York Stock Exchange under the Symbol FIC, and reported revenues of over 800 million dollars in 2007.

Why are lenders scores different from the ones I bought online?

Lenders purchase FICO scores from the three credit bureaus. But with the exception of Equifax, the credit bureaus do not sell FICO scores to consumers. The scores sold by TransUnion and Experian are their own proprietary scores. These scores may vary significantly from your FICO scores. This can be very confusing for anyone in a credit repair program who wishes to monitor their credit scores. If you are working on credit repair and want relevant lender FICO scores you can purchase them at myfico.com.

Why do I have three credit scores?

The three major credit bureaus compile data on consumers, and sell credit reports and a wide variety of marketing information based on this data. The three credit bureaus compete with each other, but because lenders have adopted the practice of minimizing risk by reviewing all three bureaus, the three bureaus are perceived as being equally important. Each bureau licenses the use of the FICO scoring software from Fair Isaac and Company and applies it to their database to produce a FICO score. All three credit bureaus must be addressed in your credit repair effort.

Why are my three credit scores different?

There are three reasons for the differences in your scores. First, creditors do not necessarily report to all three bureaus – if you examine your reports you will probably notice many differences in the content. Second, the timing of the reporting of information by each bureau is different – if you used a credit card recently your new balance is likely to be reported by each bureau at different times. And third, Fair Isaac modifies the software from time to time, and the bureaus do not all implement the new version concurrently. It is pertinent to your credit repair effort to know that when correcting reporting errors the information on each bureau may be unique.

I’ve heard that there are two types of inquiries, what are they?

There are two types of inquiries. Hard inquiries will affect your credit scores, and occur when you apply for new credit. Soft inquiries will not affect your credit score, and are triggered most often by three different events; first, when you request your own credit report; second, when prospective lenders review your credit before offering you pre-approved credit; and lastly, when a current creditor conducts a periodic review of an existing account. Because inquiries have such a small impact on your scores, they are often addressed last in any credit repair effort.

How much will inquiries hurt my credit scores?

Soft inquiries, as mentioned, have no impact on your credit score. Hard inquiries are likely to lower your scores between 1 point and 5 points. Credit repair efforts revolve around your credit scores, and it is useful to know that the FICO scoring model considers everything on your report all together. The affect of an inquiry, like other information on your report, will vary depending on everything else in your file. The more credit you have, and the more established it is, the less of an impact a single inquiry will have.

How can I increase my scores?

The categories of data that will impact your scores are your payment history, your account balances, the length of your credit history, the balance of credit types, and the amount of new credit you have. Try to not make any late payments from this point forward. You should also attempt to pay your revolving balances down. And if you don’t have any open accounts, start the rebuilding process right away by opening two secured credit cards; your credit repair effort cannot succeed without open accounts, so take action today.

How much do my credit scores really matter?

Your credit repair effort should focus on improving your credit scores. Every loan you apply for will be underwritten based on your credit scores. Insurance companies are not allowed to consider your credit scores when pricing life and health insurance, but property insurers will consider your credit scores and may even deny you coverage if they don’t like what they see. In addition, prospective employers and landlords are likely to check your credit. Make sure your scores are where they should be when you need them. If you have credit issues, begin your credit repair effort immediately.

Copyright © 2008 James W. Kemish. All Content. All Rights Reserved.