Get Your Credit Score To Soar In The Twinkling of An Eye
Ever wonder how a creditor decides whether to
grant you credit? For years, creditors have been using credit scoring
systems to determine if you'd be a good risk for credit cards and auto
loans. More recently, credit scoring has been used to help creditors
evaluate your ability to repay home mortgage loans. Here's how credit
scoring works in helping decide who gets credit -- and why.
What is credit scoring?
Credit scoring is a system creditors use to help determine whether to
give you credit.
Information about you and your credit experiences, such as your
bill-paying history, the number and type of accounts you have, late
payments, collection actions, outstanding debt, and the age of your
accounts, is collected from your credit application and your credit
report. Using a statistical program, creditors compare this information
to the credit performance of consumers with similar profiles. A credit
scoring system awards points for each factor that helps predict who is
most likely to repay a debt. A total number of points -- a credit score
-- helps predict how creditworthy you are, that is, how likely it is
that you will repay a loan and make the payments when due.
Because your credit report is an important part of many credit
scoring systems, it is very important to make sure it's accurate before
you submit a credit application. To get copies of your report, contact
the three major credit reporting agencies:
- Equifax: (800) 685-1111
- Experian (formerly TRW): (888) EXPERIAN (397-3742)
- Trans Union: (800) 916-8800
These agencies may charge you up to $9.00
for your credit report.
Why is credit scoring
used?
Credit scoring is based on real data and statistics, so it usually is
more reliable than subjective or judgmental methods. It treats all
applicants objectively. Judgmental methods typically rely on criteria
that are not systematically tested and can vary when applied by
different individuals.
How is a credit scoring
model developed?
To develop a model, a creditor selects a random sample of its customers,
or a sample of similar customers if their sample is not large enough,
and analyzes it statistically to identify characteristics that relate to
creditworthiness. Then, each of these factors is assigned a weight based
on how strong a predictor it is of who would be a good credit risk. Each
creditor may use its own credit scoring model, different scoring models
for different types of credit, or a generic model developed by a credit
scoring company.
Under the Equal Credit Opportunity Act, a credit scoring system may
not use certain characteristics like -- race, sex, marital status,
national origin, or religion -- as factors. However, creditors are
allowed to use age in properly designed scoring systems. But any scoring
system that includes age must give equal treatment to elderly
applicants.
What can I do to improve
my score?
Credit scoring models are complex and often vary among creditors and for
different types of credit. If one factor changes, your score may change
-- but improvement generally depends on how that factor relates to other
factors considered by the model. Only the creditor can explain what
might improve your score under the particular model used to evaluate
your credit application.
Nevertheless, scoring models generally evaluate the following types
of information in your credit report:
- Have you paid your bills on time? Payment history typically is a
significant factor. It is likely that your score will be affected negatively
if you have paid bills late, had an account referred to collections, or
declared bankruptcy, if that history is reflected on your credit report.
- What is your outstanding debt? Many scoring models evaluate the
amount of debt you have compared to your credit limits. If the amount you
owe is close to your credit limit, that is likely to have a negative effect
on your score.
- How long is your credit history? Generally, models consider the
length of your credit track record. An insufficient credit history may have
an effect on your score, but that can be offset by other factors, such as
timely payments and low balances.
- Have you applied for new credit recently? Many scoring models
consider whether you have applied for credit recently by looking at
"inquiries" on your credit report when you apply for credit. If
you have applied for too many new accounts recently, that may negatively
affect your score. However, not all inquiries are counted. Inquiries by
creditors who are monitoring your account or looking at credit reports to
make "prescreened" credit offers are not counted.
- How many and what types of credit accounts do you have?
Although it is generally good to have established credit accounts, too many
credit card accounts may have a negative effect on your score. In addition,
many models consider the type of credit accounts you have. For example,
under some scoring models, loans from finance companies may negatively
affect your credit score.
Scoring models may be based on more than just information in your
credit report. For example, the model may consider information from your
credit application as well: your job or occupation, length of
employment, or whether you own a home.
To improve your credit score under most models, concentrate
on paying your bills on time, paying down outstanding balances, and not
taking on new debt. It's likely to take some time to improve your score
significantly.
How reliable is the
credit scoring system?
Credit scoring systems enable creditors to evaluate millions of
applicants consistently and impartially on many different
characteristics. But to be statistically valid, credit scoring systems
must be based on a big enough sample. Remember that these systems
generally vary from creditor to creditor.
Although you may think such a system is arbitrary or impersonal, it
can help make decisions faster, more accurately, and more impartially
than individuals when it is properly designed. And many creditors design
their systems so that in marginal cases, applicants whose scores are not
high enough to pass easily or are low enough to fail absolutely are
referred to a credit manager who decides whether the company or lender
will extend credit. This may allow for discussion and negotiation
between the credit manager and the consumer.
What happens if you are
denied credit or don't get the terms you want?
If you are denied credit, the Equal Credit Opportunity Act requires that
the creditor give you a notice that tells you the specific reasons your
application was rejected or the fact that you have the right to learn
the reasons if you ask within 60 days. Indefinite and vague reasons for
denial are illegal, so ask the creditor to be specific. Acceptable
reasons include: "Your income was low" or "You haven't
been employed long enough." Unacceptable reasons include: "You
didn't meet our minimum standards" or "You didn't receive
enough points on our credit scoring system."
If a creditor says you were denied credit because you are too near
your credit limits on your charge cards or you have too many credit card
accounts, you may want to reapply after paying down your balances or
closing some accounts. Credit scoring systems consider updated
information and change over time.
Sometimes you can be denied credit because of information from a
credit report. If so, the Fair Credit Reporting Act requires the
creditor to give you the name, address and phone number of the credit
reporting agency that supplied the information. You should contact that
agency to find out what your report said. This information is free if
you request it within 60 days of being turned down for credit. The
credit reporting agency can tell you what's in your report, but only the
creditor can tell you why your application was denied.
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.
© Copyright - www.deleteuglycredit.com
Omar M. Omar is the owner of http://www.deleteuglycredit.com
and - Author of "The
Credit Repair Bible" book. The website is dedicated to providing credit
consumers free advice on how to repair
credit. It also provides credit consumers numerous information about their
credit report, credit laws, and their rights as a consumer.
You
have permission to publish this article electronically or in print, in your
Newsletter, on your website, or in your E-Book, as long as the author's Resource
Box is included with the article.
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