What is Credit Scoring?
Credit scoring is one way lenders determine the amount of risk involved when deciding whether to fund or deny a loan. Your score represents the likelyhood that you'll be able to meet your obligations under the loan. Credit scores range from 350, a very high risk applicant, to 950, the lowest risk possible.
Credit scores are based exclusively on information obtained from your credit report. Factors such as your income and how much money you have saved are not considered. Your gender, race or nationality are never considered in your credit score. However, details of your relationships with other lenders are many and detailed. How much money you owe, your being prompt or delinquent on payment and how long you've been using credit are all considered. Your score is determined by factoring all the good and bad information on your report.
There is a specific way in which a lender's history is considered when factoring their credit score.
35% of your score is based on your credit performance- 30% is based on how much debt you currently carry
- 15% is based on how long you have been using credit
- 15% is based on the types of credit available
- 5% is determined by your applying for new loans.
How It Adds Up
The number one factor in determining your credit performance is how timely you pay your bills. The size of the loan involved is less important than your making your payments on the agreed schedule. To keep your credit in good standing, make sure that you make your payments, even on the smallest debts, reliably. Where credit cards and other forms of revolving credit are concerned, keep your balances low.
Because shopping for large loans, such as a mortgage or an auto loan, may entail several inquiries while you're looking for the best rate, these inquiries are scored differently. Mortgage and auto loan inquiries will still appear on your credit report but inquiries within the last year are ignored for the first 30 days. After that, multiple inquiries within the next 14 days are counted as one inquiry.
A credit score will have a "reason code" attached to it. The reason codes explain why a credit score may be lower than expected. They also help the lender explain why you may be offered higher than expected rates or denied a loan altogether.
In order for a borrower to have a score at all, they must have one account that has been open for six months or longer and at least one of those accounts must have had activity in the last six months. Without this, there isn't enough information to determine an accurate score.
If you have no credit history at all, you may need to establish a good history before applying for a mortgage loan.
Credit Repair
There's no point in trying to cover up any credit problems you may have had. Lenders know that there can be good reasons for bumps in the road: illness, injury, loss of a job and other unforseen circumstances happen to many people at one time or another. If you've made an effort to fix any credit problems you've had in the past and if you've been on your regular payment schedule for a year, your chances may be better than you think.
If you carry too much debt already, you might find yourself having to make some tough decisions. You may have to cut back on your lifestyle expenses, selling that second car, getting a loan from a relative, selling a home you own to pay off debt and then renting.
If you're in real trouble, a Consumer Credit Counseling Service may be able to help. A CCCS might be able to set up your payments as if it were a Chapter 13 bankruptcy arrangement without your ever having to file bankruptcy.
Bankruptcy is an option if all other avenues are exhausted. A Chapter 13 bankruptcy is an arrangement where the court will give you a certain amount of time to pay back all your debts, sometimes as long as five years. While it does less damage to your credit than a Chapter 7 bankruptcy, a Chapter 13 will likely stay on your credit report longer. The reason and Chapter 13 takes longer than a Chapter 7 to clear off of your credit report is that you'll be in bankruptcy for the amount of time you're granted to pay back your debts by the court plus your credit report will reflet the bankruptcy for 7 years after you've comleted the repayment.
A Chapter 7 is the hardest on your credit but is an option for those who will never be able to repay their debts. The bankruptcy period is typically 6 months and you're left with no debt. However, a Chapter 7 will show on your credit report for 10 years. With lending requirements becoming tougher and tougher, you may find yourself having a hard time getting any future loans.
If you've got your credit under control and you can make your payments on time, be dilligent about it. Take the initiative to make sure that your creditors have recieved their payments and that you recieve your statements on time. Don't hold off paying until the due date if you can avoid it, pay early, especially if you're carrying a balance. It's not just for your credit report, either. Most companies calculate interest daily. Make that payment early, and it's less money out of your pocket!
It's best to cultivate a good relationship with your lenders. If you can't make a payment, call and explain. Most of them will work with you to arrange a payment schedule.
Always get advice before making any big decisions about your finances. It might be tempting to draw from your retirement or from insurance policies to pay off debt but that may entail harsh consequences in the future.
Credit cards merit serious attention. Only get credit cards that offer the lowest interest rates and don't use them for luxuries. While a credit card can bail you out of a crisis, the high interest rates many companies charge can quickly leave you swimming in debt.
Other Factors
When determining when to extend credit, lenders look at a number of factors and make an evaluation. Your raw credit score is only one, though an important, factor by which lenders make their decisions. Lenders look at your income and how likely it is to increase over time, for instance. While you might have the same raw credit score as another borrower, it is possible that your options may be different based on your payment history, how much debt you currently carry and how likely it seems that you'll be able to make your payments on time.
Your credit score will be treated differently depending on the loan for which you're applying. A smaller loan will likely require less of the borrower than will a mortgage. Your loan officer can help you understand your options and help you find the best one for you.
Identity theft
One of the most frigtening scenarios for anyone is to have their identity stolen. Criminals can use your personal information to many ends and, quite often, victims are unaware it even happened for months after the fact. Checking your credit report once per year is not only good credit practice, it keeps you informed of anything suspicious. Fortunately, there are steps you can take to minimize the risk.
Rip up or shred sensitive documents. A sensitive document is anything that has your name and address, social security number, bank information or other compromising information on it.
Late or missing bills require a call to your creditors. If a bill didn't show up on time, call the creditor and ask why.
Keep a lock on your mailbox and get your mail daily. Remember to speak with your lettercarrier if you're considering adding a lock as the carrier will, obviously, need to able to open your mailbox.
Avoid giving out your social security number if it's not necessary.
Check your debit and credit card statments dilligently.
If you should happen to fall victim to identity theft, contact the police immediately. Most police departments have dealt with identity theft before and will help you through the process of starting a police report. Then, call the credit reporting agencies and let them know what happened. They can report the fraud and stop any new loan applications in your name. Contact your bank. Your bank can freeze your ATM card and help you stop your accounts from being used.
Always keep a detailed written record of everyone with whom you speak and what they say regarding your identity theft. Use registered mail everytime you have to mail something connected with the theft. A good paper trail will help your situation immensely.