Credit Score
Learn The Top 3 Negative Factors That Will Lower Your FICO Score!

Understanding Your Credit Score! Ever wonder how a creditor decides whether to grant you credit? For years, creditors have been using a credit scoring system to determine if you'd be a good risk for credit cards and auto loans.

More recently, your credit report score has been used to help creditors evaluate your ability to repay home mortgage loans.

Here’s how the credit system works in helping to decide who gets credit and why.

The three large credit bureaus have each adopted a ranking or scoring system called a FICO® score, by which, for a fee, you can receive a numerical evaluation of your present credit condition.

This is meant to approximate the score you would receive from a lender such as a bank. The score is compiled directly from the positive and negative factors found in your credit report.

The credit score is divided into five categories and breaks down as follows:

1. Your credit history =35%
2. Amount currently owed=30%
3. Length of your credit history =15%
4. Type of credit you use =10%
5. New credit obtained =10%

Equifax uses a scoring system which ranges between 300 and 850, TransUnion’s system ranges between 150 and 934 and Experian’s system ranges from 340 to 820.

For example, under the Experian system a score of:

• 340-600 = highest possible risk to the lender
• 601-660 = medium-high risk
• 661-720 = medium risk
• 721-780 = medium-low risk
• 781-820 = low risk

The average fico scores checked online are a 661 credit score, 781 credit score and score 820 and above.

When you receive your numerical score, you will also receive a national percentile ranking. This number reflects the percentage of the US population with scores higher or lower than yours.

For example, under the Experian system, a credit score of 800 puts you into the 92 percentile.

This means that only 8% of the population had a higher score than you while 92% of the population had a lower credit score than you. Higher scores mean lower delinquency rates. This is the rate at which 100 borrowers in a specific range will default on a loan, declare bankruptcy, or fall 90 days behind in their payments.Thus, a delinquency rate of 50% means that out of 100 borrowers 50 will commit one of the above.

Common factors that can lower your credit score include:

1. Owning too many credit cards simply owning too many credit cards increases your potential for indebtedness.
2. Too many current accounts with outstanding balances regardless of your ability to pay, lenders view this as a potential problem.
3. Failure to significantly reduce loan amounts your level of debt is too high in relation to your total credit limit and to your total loan amounts. The best strategy is to have few debts and keep balances low.

Be aware that while a lender will certainly evaluate your credit history, it is only one component of the final decision. Your income, employment history, assets, liabilities, and numerous other factors play a significant role in his decision to offer credit.

While there are many different scoring models, and not all bureaus use the same model, lenders will use the score as a time saving summary of your credit report.

Some credit bureaus charge for the score, some provide it for free if you purchase your credit report, and others tie the score to a subscription package. Since your credit is based upon your credit report, the way to improve your score is by improving your credit report.

Remember, credit bureaus accept without your knowledge any negative information about you whether from a creditor or other source, and regardless of whether it is true. The credit bureau is under no obligation to check the accuracy of this credit information until you challenge it.

Unfortunately, creditors will rely heavily upon the information in your credit report though the credit bureau has no responsibility for its accuracy. The burden is on you to keep your report as accurate as possible.

If you’ve been denied credit, or didn’t get the rate or credit terms you want, ask the creditor if a credit scoring system was used. If so, ask what characteristics or factors were used in that system, and the best ways to improve your application.

If you get credit, ask the creditor whether you are getting the best rate and terms available and, if not, why. If you are not offered the best rate available because of inaccuracies in your credit report, be sure to dispute the inaccurate information in your credit report.

Because your credit report is an important part of many credit score systems, it is very important to make sure it’s accurate before you submit a credit application. An amendment to the federal Fair Credit Reporting Act (FCRA) requires each of the major nationwide consumer reporting companies to provide you with a free copy of your credit reports, at your request, once every 12 months.

Free reports have been phased in during a nine-month period, starting with the states in the West and ending with states in the East. Beginning September 1, 2005, free reports will be accessible to all Americans, regardless of where they live.

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