Understanding Your Credit Score
This rating system is meant to develop a snapshot of the risk you currently represent to a lender. Several parameters in your credit file, including length of credit history, number of open accounts, loans, mortgages, public records, and others are formulated to produce a three-digit score between about 300 and 950. There are other scores used by lenders and insurance companies (some of which are developed by FICO) such as Application and Behavior scores. These other scores take other information into account. Usually a lender will use a combination of your credit score with other factors when determining your risk. They all have the same objective, to determine the borrower's potential risk. Regardless of whether the score was generated by FICO or a system based on FICO parameters, they all yield an industry standard three-digit score. This score places the borrower in one of three main categories (we named the third one ourselves.)
Prime, sub-prime, and shafted
Prime If your credit score is above 680, you are considered a "prime borrower" and will have no problem getting a good interest rate on your home loan, car loan, or credit card.
Sub-Prime If your credit score is below 680, you are "sub prime", and will likely pay a much higher interest rate on your loan.
Shafted Below 560 is the shafted score. At least that is how most lenders and credit issuers perceive it. You can still get a credit card but you will likely be hit with a security deposit or high acquisition fee. In addition to that your interest rate will likely be 22 to 23%. You can forget about most home loans and the majority of new car loans at this score. Below 560 is no place to be. You will pay much, much more in higher interest and unnecessary fees. You may even pay more for your insurance rates. A very low score can even prevent you from getting a job with many companies. If your in this catagory
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How are credit scores calculated?
The methods of calculating your FICO may differ slightly depending on the credit bureau. When obtaining your score from one of the Credit Bureaus it is important to understand that your score does not come directly from FICO. It is adapted to each bureau and is given its own name: Equifax uses "Beacon", Trans Union uses "Empirica", and Experian uses "Experian/Fair Isaac." These scores are also referred to as your "Bureau Scores."
Since your score is derived from your bureau data, it will change every time your reports change. However your score is calculated, it will always take into consideration many categories of information. No one piece of information or factor determines your score. As the information in your credit report changes, the importance of one or several factors may change in your FICO score. Lenders look at many things when making a credit decision, including your income and the kind of credit you are applying for. However, your FICO score does not reflect these facts as it only evaluates the information retained by the credit reporting agency.
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What factors affect your credit score?
There are five factors which are used in credit scoring calculations that determine your overall credit score.
Previous Credit Performance (Payment History) 35% A lender wants to know what your payment history is like. Have you paid everything on time, are you late on anything now, and so on. Your payment history is just one piece of information used in calculating your score, although it can be the very important.
Current Level of Indebtedness (Amount Owed) 30% How much is too much? Can the borrower pay me and still afford to pay his other bills? Not necessarily. Having available credit can actually help your ratio of debt to available credit. These are the types of questions that most borrowers want to know and the answers are almost as important as your previous credit history.
Amount of Time Credit Has Been In Use (Length of Credit) 15% Generally speaking, the longer the credit history the better your score. However, this factor only makes up 15% of your total score so even young people, students or others with short histories can still score high overall as long as the other factors show good. If you are new to credit than there is little you can do to improve this part of your score. Open an account and be patient.
Pursuit of New Credit (10%) Credit is much more popular today. Just look at the number of credit card offers you get via the Internet and in the mail. Consumers can now shop for credit and find the best terms to meet their needs. Each time someone runs a credit check on you, it creates an inquiry.
Fair Isaac has changed some of its calculations to account for these new trends. Specifically, they treat a group of inquiries - which probably represents a search for the best rate on a single loan - as though it was a single inquiry (note: this only applies to auto or mortgage loan inquiries.) For example, auto loan inquires that are within 14 days of each other only count as one inquiry.
Types of Credit Experience (10%) A healthy mix of different types of credit, installment loans, retail accounts, credit cards, and mortgage. This score is not normally a key factor in determining your score but it can help a close score. Its not a good idea to try and open different types of accounts just to try and make this factor better. It will likely reduce your score in other areas. You should never open accounts you don't intend to use anyway.
What type of accounts you have, and how many, can make a big difference. The optimal ratio of installment versus revolving accounts depends on your profile and differs from person to person. One factor that seems to have significant influence is your percent of open installment loans. Too many can lower this portion of your score. For more information
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Now that you know how your score is calculated, you can begin making changes to your current financial planning. The best things you can do are simple.
Pay your bills on time. Sounds simple, but this is the biggest thing you can do to keep your score high. Delinquent payments and collections have a major negative impact on a score.
Keep your balances low on unsecured revolving debt like credit cards. High outstanding balances can affect a score.
The amount of your unused credit is an important factor in calculating your score. You should only apply for credit that you need.
Make sure the information in your credit report is correct. If its not, dispute it with the credit agencies and/or with the creditor directly.
Removing negative items on your credit reports has the biggest impact on your FICO score. Generally, negative items stay on your reports for seven years but you can hire a professional credit report repair service such as Lexington Law Firm to do it for you.
You can try to understand the laws and your self, but we have found it's so much easier to have someone do it for you. We strongly recommend using Lexington Law Firm, they are the industry leaders.
The Law is on Your Side
Many consumers have the mistaken idea that credit bureaus are federally supported organizations backed by a vast array of laws meant to protect creditors. Nothing could be further from the truth. Aside from the government simply recognizing the need for credit reporting, credit bureaus have absolutely nothing to do with the government. Credit bureaus are simply huge bureaucratic companies which exist for the soul purpose of making money by selling information about you-information they never bothered to verify.
Because of the vast potential for error in the credit reporting system, the United States Congress has enacted laws to protect the consumer from being victimized by the credit bureaus. It is your right and responsibility to make use of these laws.
The Law versus Practical Reality
As the credit bureaus computerized their processes and greatly expanded their reach and influence in the late 1960s and early 1970s, consumer complaints began to mount at the FTC and state attorney general offices. The credit reporting agencies quickly became huge bureaucracies second only in size to the federal government. The credit bureaus expressly served only the needs of their clients, the credit grantors. Many consumers were negatively affected by the credit bureaus, but they had no way to correct or change their credit information.
The American consumer lay completely at the mercy of the credit bureaus. The United States Congress enacted the Fair Credit Reporting Act (FCRA) in 1971 to insure that the credit bureaus investigate the credit items disputed by consumers. This federal law set procedural guidelines, which gave the consumer the right to challenge the accuracy, validity, and verifiability of the credit listings appearing in their consumer credit report. It also required that the credit bureau delete any credit listing if it was inaccurate or could not be verified.
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In theory, the FCRA charges the credit bureaus with responsibility to the consumer as well as the credit grantor. In reality, the credit bureaus resist, resent, and reject consumer disputes. The credit bureaus would rather be left alone to make a profit. And, each time a consumer challenges his credit, profit is lost.
The credit bureaus first defend their profits by erecting walls of stall tactics, including requests for more information, further clarification, and additional identification. The vast majority of consumers give up before they even receive copies of their credit reports. If a consumer manages to get a credit report, decipher the codified information, write a coherent dispute, and mail it, the bureaus may still find some reason to disregard the challenge. The entire dispute system is designed to frustrate and discourage the consumer.
Many consumers have the idea that the credit bureaus must complete their investigation within thirty days or be forced to remove all disputed information. They threaten to sue the credit bureaus if they don't conclude their investigation in time. In practice, such thinking is delusional. Nobody forces the credit bureaus to do
anything.
However, if you manage to submit a valid dispute letter, and the credit bureau investigates your dispute, the chances of success are good.
If a credit bureau cannot verify an item before completing its investigation, that item will be removed. Many creditor grantors are simply reluctant to take the time to verify the data. While the credit bureaus are in the business of reporting credit histories, creditor grantors are not.
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The Fair Credit Reporting Act (FCRA)
Below is a summary of the FCRA. The full Act can be obtained directly from the Federal Trade Commission's web site here.
Fair Credit Reporting Act (Summary)
Public Law 91-508
The Fair Credit Reporting Act (FCRA) allows a consumer to challenge the information on his credit report on the basis of "completeness and accuracy." If, after a reinvestigation by the credit bureau, the disputed information "is found to be inaccurate or can no longer be verified, the [credit bureau] shall promptly delete such information."
The credit bureaus are required to complete the investigation within a "reasonable period of time." This period has been set at thirty days.
The credit bureaus can ignore the consumer dispute if they have reason to believe that the dispute is "frivolous or irrelevant." The FTC commentary on the FCRA cites, as an example of a frivolous dispute, a dispute wherein the consumer challenges all negative items on his credit report without providing any allegations regarding specific items in the credit file. However, "A [credit bureau] must assume a consumer's dispute is bona fide, unless there is clear and convincing evidence to the contrary."
When a consumer challenges a negative credit listing on the basis of extenuating circumstances, such as health problems, divorce, job loss, etc., the credit bureaus are entitled to ignore that dispute.
When a consumer submits a dispute which is neither frivolous nor irrelevant by credit bureau standards, the credit bureau must "at a minimum... check with the original sources or other reliable sources of the disputed information and inform them of the nature of the consumer's dispute." In some cases of consumer dispute, "Reinvestigation and verification may require more than asking the original source of the disputed information the same question and receiving the same answer."
In other words, when a consumer files or re-files a valid dispute, the credit bureaus must contact the source of the credit information (the creditor) and confirm that the information is accurate, verifiable, and not obsolete. In some circumstances, the credit bureau is required to go beyond a simple verification of the creditor's own computer record. If, within 30 days, the credit bureau has not received verification from the creditor, then the credit bureau must promptly delete the credit listing.
In theory and law, the process is deceptively simple, thus leading many people to think that they can easily handle this themselves "for the price of a few postage stamps." Most quickly discover that the credit bureaus have made it much more difficult than one would imagine. For help in this, we recommend using
Lexington Law a professional credit report repair company.
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