Credit Scoring Basics

Credit Score History

The credit scoring system became prevalent during the 1980′s as a way for lenders to quickly evaluate a potential borrower’s creditworthiness. The system was found to accurately predict financial risk over time and grew to several different industries. Now credit scoring is used by lenders, insurers, landlords, employers, utility companies and even judges to evaluate your lending behavior. A basic knowledge can help you improve credit score reports.

Algebra –  Thousands of different formulas exist today for various evaluation purposes. Each unique scoring system is accurate and correct for its own application. The scores you can order online use an algorithm created for consumers that approximates these different formulas. Your online credit scores may vary a bit from the score your lender uses, but they should be in the same range depending on the score you purchase and its purpose. Knowing it can help improve credit score reports.

Chemistry – The basic scoring formula takes into account several factors from your credit reports. The impact of each element fluctuates based your own credit profile, and are important in the goal to improve credit score:

Payment history – A good record of on-time payments will help improve credit score reports.

Outstanding debt – High balances in relation to your limits can harm your credit. Aim for balances under 35% but to get biggest impact pay balances as close to 0% as you can. This will help to improve credit score reports.

Credit account history – An established credit history makes you a less risky borrower. Think twice before closing old accounts before a loan application.

Recent inquiries – When a lender or business checks your credit, it causes a hard inquiry and a slight ding to your credit score. Apply for new credit in moderation.

Types of credit – A healthy credit profile has a balanced mix of accounts and loans.

Economics – When you are preparing for a major purchase make sure you check your scores and reports from all three reporting agencies: TransUnion, Equifax and Experian. Looking at your scores and reports a few months before your loan application will help you get a complete picture of your credit health. Worried if your score makes the grade? If your score is above 740 you will probably qualify for a preferred loan. Under 640, you may have trouble receiving new credit. If your credit score is a little low, pay your bills on time, reduce your debt, remove inaccuracies and avoid new inquiries for a few months. Plus, don’t forget that your score is not the only factor a lender may look at when they are evaluating your financial standing.

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