Do you ever wonder what the banks and other creditors are actually looking at when they pull your “credit score”? Are you at all curious as to what is actually on those credit reports and what it tells the person that you are asking for credit from? Well, It’s your right to know what credit scoring agencies are saying about you.
Finding out this information is doesn’t cost a lot and takes only minutes to do – which is a small amount of time and money very well spent. In fact, you can get your own no-cost credit report from Experian by clicking here.
What exactly is a credit score?
Simply put, credit scoring is a method of assessing the credit risk of a loan applicant. It uses mathematical models to evaluate a person’s credit worthiness based on their credit history and current credit accounts. The system was first developed in the 1950s, but has come into widespread use in just the last couple of decades.
In the early ’80s, the three major credit bureaus (Experian, Equifax and Trans Union) each developed scoring models that allowed them to offer a score based solely on the data of one individual. Creditors, especially those in the home mortgage industry, frequently use these scores when deciding who gets a loan and at what rate. However, it’s worth remembering that creditors also consider other information, such as your salary or employment history, when making loan decisions.
What are the components of a credit score?
Credit scores are reported as a number, usually in the 300-900 range. Simply put, the higher the number the better the credit score. Creditors see the credit score number as an indicator as to the likelihood that a borrower will repay the loan.
Credit scores are developed by a formula that uses the following information:
- The history of late payments
- Number of non-payments
- Current level of debt (Percentage of total credit being used)
- Types of credit lines
- Length of credit history
- Number of credit inquiries
- History of credit applications
- Poor credit behavior, such as writing bad checks
One major factor about credit scores is that they do not factor in any personal details such as race, gender and religion when determining your score. Although it is important to get a credit report from all three major credit bureaus because each one has its own method for calculating credit scores, the scoring models have been fairly well standardized so that a “600″ score at one bureau is roughly the equivalent to the same score at another.
What Is A Good Credit Score?
Generally speaking, a score of 650 or higher is indicative of very good credit, and represents a very good credit score. Individuals with a score of 650 and above will, more than likely, have the best opportunity to obtain high quality loans at the most competitive interest rates.
A credit score between 620 and 650 indicates good credit, but also raises red flags that indicate potential areas that creditors will want review before granting credit. Many lenders may request additional documentation before a loan will be approved.
Credit scores below 620 indicate previous problems with credit. A lower credit score is not the be-all and end-all as borrowers with scores below this level may find they can still obtain a loan. However, the loan application process may be lengthier and more involved as lenders identify scores below this threshold to be an indicator of greater credit risk and as such, the lender must do more due diligence to try to reduce or mitigate their risk.
Remember, it is your right to find out what your credit score is and what your credit report says about you. The ability to borrow money is very important for those of you who want to be homeowners, or would like to purchase that new car you have always dreamed about. Managing your credit score and building a good credit score is very important in borrowing money for those dreams and getting the best interest rates possible.
Additional Credit Score Resources: