Your Credit Score

How Your Credit Score Is Determined and What You Can Do to Improve It

Ways to Control Your Credit Score

Your credit report can is your detailed financial history, while your credit score is an objective summary of that information, boiled down into one number that’s supposed to reflect your creditworthiness at one given point in time. Your credit score is fluid and changes with your financial circumstances.

Different weight is given for different aspects of your credit report and a mathematical formula is used to arrive at your final score.

Credit Score Factors

The major factors that go into your credit score are:

• Your payment history
• The age or length of time you’ve been handling credit
• The amount of credit outstanding and the ratio of your indebtedness to the total. In other words, if you’re close to maxing out your credit cards, your score will be lowered. Use as little of your outstanding credit as possible.
• Whether there have been recent applications for credit.

The credit score itself is not part of your credit report, but is generated when the credit report is prepared. It is a fluid number that changes as your circumstances change.

Why We Have Credit Scores

Previously the determination to grant credit was placed in the hands of a loan officer or committee. In addition to taking time, there was always the chance of bias or human error.

In the 1980’s, Fair Issacs & Co., now a part of Equifax, began using computer models that lumped together the actions of a million or more consumers using the same type of credit. These would generate one credit score if you were applying for a mortgage, another if you wanted a car loan and a third if you trying to get a credit card. There are thousands of possible credit scores, depending on what you are doing.

This was supposed to make the credit process faster, fairer and more accurate. Bias is removed since the score does not take into account such things as sex, age, race or where you live. It’s supposed to be more accurate since your behavior is supposed to be similar to others with the same credit score. And it’s faster, since the number is generated at the push of a button.

Of course the lender is most likely not basing its decision entirely on the credit score. Information on your application, tax returns if applicable, work history and any criminal record will be considered. So those bias factors come back into play.

If you are applying for a mortgage, the lender must reveal your score. Otherwise you can buy it from the major reporting agencies, Equifax, Experian or TransUnion. It will cost about $7.00.

Credit Score Weighing

Because of the nature of credit scores, more recent financial activities are more important than older ones, although the model will hold bankruptcies, legal judgments, foreclosures and other major no-no’s against you for as long as allowed by law.

Improving Your Credit Score

The best way to keep your credit score up is to pay your bills on time and manage credit wisely. Don’t open new accounts for the sake of doing so. It seems up in the air as to whether closing unused accounts will help or harm your score.

To complicate matters further, things that didn't use to affect your credit score now can. Libraries, departments of motor vehicles and other agencies are cracking down on scofflaws and sending unpaid fines out for collection.

If you haven't returned your library books or paid your late fees or if you ripped up your last parking ticket instead of paying it, this information may find its way onto your credit report and lower your credit score.

Some consumer advocates are calling this unfair, because this behavior is not necessarily indicative of your ability to repay debt. But right now, this is the way things are in most states, so be aware.

Credit Score Ranges and Their Affect on the Cost of Credit

Credit scores can range from 300 to 850, with the majority being in the 600 – 700 range. It is estimated that about 70% of borrowers have a score over 660, which is considered prime territory and another 18% are in the 620 – 659 range, the highest subprime class.

Things are not as simple as they seem however. One mortgage lender may place a potential borrower with a 675 credit score in its prime or A category, while another lender might consider the same score subprime or A-. The difference might mean a interest rate of anywhere from a quarter point to two points in the cost of the loan.

It also appears that more and more lenders are yearning to place creditors in the subprime class in order to boost their profits. Taking this into account, along with the effects of a low score on your job application, auto insurance premiums and your ability to rent a house or apartment (and maybe even what your electric company charges you for a deposit) means you have to strive to keep your credit score as high as possible.

The two best ways of doing this are paying on time and using as little of your already outstanding credit as possible.

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