Credit Score and Reports

Understanding credit scoring can help you manage your credit health. When applying for credit, (or even insurance) that business will want to know your current credit score. To understand the credit risk they take with you, nearly all lenders will look closely at your credit score. A better score means better financial options for you.

Most people think that only a credit card, a car loan, a personal loan or a mortgage loan will trigger an inquiry of your credit score. But applying for car insurance will as well as some health or life insurance as well. Based on the company that compiles the score each inquiry affects (usually lowering) your credit score.

Your credit score influences the credit and the terms (interest rate, etc.) that are available to you. By knowing how your credit risk is evaluated, you can take actions that will lower your credit risk and end up raising your score. A good credit score takes time to build (sometimes years) and only two months to lose.

WHAT IS A CREDIT SCORE?
A credit score is a number lenders use to help them decide: “If I give this person a loan or credit card, how likely is it that I will get paid back on time?” A score is a snapshot of your credit risk at a particular point in time.

The most widely used credit scores are FICO® scores. A FICO score is a credit score developed by Fair Isaac & Co. Credit scoring is a method of determining the likelihood that credit users will pay their bills. Fair, Isaac began its pioneering work with credit scoring in the late 1950s and, since then, scoring has become widely accepted by lenders as a reliable means of credit evaluation. A credit score attempts to condense a borrowers credit history into a single number. Fair, Isaac & Co. and the credit bureaus do not reveal how these scores are computed. The Federal Trade Commission has ruled this to be acceptable. Lenders use FICO scores to make billions of credit decisions every year.

Credit scores are calculated by using scoring models and mathematical tables that assign points for different pieces of information which best predict future credit performance. Developing these models involves studying how thousands, even millions, of people have used credit. Score-model developers find predictive factors in the data that have proven to indicate future credit performance. Models can be developed from different sources of data. Credit-bureau models are developed from information in consumer credit-bureau reports.

Credit scores analyze a borrower's credit history considering numerous factors such as:

• Late payments
• The amount of time credit has been established
• The amount of credit used versus the amount of credit available
• Length of time at present residence
• Employment history
• Negative credit information such as bankruptcies, charge-offs, collections, etc.