Thursday, March 10, 2011, PM | Leave Comment
You borrow something, let’s say from your neighbor – perhaps a lawnmower – and at some point you return it. If you did not break it and returned it to its proper owner, next time, your neighbor will lend you the tool more happily. But if you broke it, did not bother to fix it, and returned it, you will make it harder for your neighbor to lend you the tool next time. Your credit works in an almost similar fashion.
In essence, a credit score gives a snapshot of your credit risk at any given time. The higher the score, the less risk and more trust you present to the money owner. Lenders, insurers, landlords, employers and utility companies use your credit score to determine if
- you qualify for a loan,
- at what interest rate and
- at what credit limit.
It helps predict how creditworthy you are, or how likely it is that you will repay a loan and make timely payments. It is weighed even more heavily when you apply for unsecured credit, or credit lines and credit cards that do not require collateral as against a secured loan such as mortgage.
Creditors collect information about you and your credit experience from your credit application and credit report. This information may include:
- Bill-paying history
- The number and types of accounts you have
- Late payments
- If you have applied for new credit recently
- Outstanding debt
- How long you have had existing accounts
- Collection actions
Using a statistical program, creditors compare your information to the credit performance of consumers with similar profiles.
Each creditor may use one of two models for different types of credit.
- Its own credit scoring model or
- A generic scoring model developed by a credit scoring company.
A credit scoring system awards points for each factor that helps predict who is most likely to repay a debt. The total number of points is what’s known as a credit score. Get familiarized with how FICO Scores work. You have three FICO scores, one for each of the 3 credit bureaus.
Each FICO score is based on information the credit bureau keeps on file about you. As this information changes, so do your credit scores. FICO scores range from 300 to 850. A lender will offer you a better interest rate the higher your FICO score is. Having poor FICO scores can lead to higher interest rates.
In a Nutshell
Generally, negative information remains on your credit report for about 7 years, while bankruptcy filings typically stay for about 10. A negative rating can make it more difficult to get loans or credit, and often mean you will pay more interest because lenders consider you a high risk. However, taking steps to improve your score can help you qualify for better rates from lenders.