When lenders make credit decisions, they generally utilize between one and three credit bureau reports. Many lenders today order a 3-in-1 credit report, which is commonly referred to as a tri-merge. These type of reports contain all of your personal information from the three leading credit bureaus... Equifax, Experian and TransUnion. Credit scores are calculated by applying a mathematical equation that evaluates all of the various types of information that is contained in your credit report. Credit bureau risk scores were developed by Fair, Isaac and Company and they are commonly referred to as FICO scores. Lenders utilize these scores to help them determine just how likely an individual is to make payments on time and to actually repay the entire amount of the loan. Over several decades, it has been proven that credit scoring is a very accurate method of identifying an individual's level of credit risk.
It is not unusual to find one or more errors on an individual's credit report. Even though these errors may be totally responsible for your loan being turned down, it is your total responsibility to correct any discrepancies that are found on your credit reports. Credit bureaus are responsible to correct your credit report within 30 days after being furnished proof of an error. If they fail to correct any such information within this time period, they are responsible by law to immediately remove this information from your credit report.
Each of the credit bureaus may have different information about you on file and if you don't check your credit bureau reports you won’t have any idea if there’s any inaccurate information listed. It’s a good idea for you to check your credit bureau reports each year to make sure that all of the information that's on your reports is accurate. Don’t worry about the expense. There is none. You are able to order all three credit bureau reports each year for free (link provided below). You will be able to review all of the information that each credit bureau has on file about you except your credit score. If you want to know your credit score, you will have to pay a small fee. They will also offer to provide you with your score for free if you will try their credit monitoring service.
This is just the beginning of understanding how credit bureau reports are compiled. Only by reviewing the following information can you hope to improve your personal credit and your risk score. Credit will follow you for your entire lifetime. Its important for you to know how to maximize your credit and take full advantage of the buying power that it ultimately provides. The following information will help you to understand just how your score is determined.
10% of Your Credit Score Equates to Recently Established Credit
Are you taking on more debt? People tend to have more established credit today then ever. They not only use normal channels to shop, they are now establishing credit on the internet. Credit scores reflect this fact. However, research shows that opening several credit accounts in a short period of time does represent greater risk, especially for people who do not have a long established credit history. This also extends to credit requests, as indicated by "inquiries" (a request by a lender to get a copy of your credit report) that were made to the credit reporting agencies.
The credit bureau scores distinguish between searching for many new credit accounts and rate shopping, which is generally not associated with higher risk. In part, this is handled by treating a group of inquiries, which probably represents a search for the best rate on a single loan as though it was a single inquiry.
Your score considers how may new accounts that you have. This score reflects how many new accounts that you have opened and what type of accounts they are. It may also score by looking at how many of your current accounts are actually new and just how long it has been since you actually opened those accounts.
Scoring also takes into consideration how many recent requests that you have made for credit. A personal inquiry to secure a credit report will not be considered part of this score since this action is considered a "consumer-initiated inquiry" and not an indication that you are seeking new credit. Also, the score does not take into account when a lender requests your credit report or score in order to make you a "pre-approved" credit offer, or to review your account with them, even though these inquiries may show up on your credit report.
Finally, this score will determine if you have been able to successfully establish a good credit history following a period of past payment problems. Re-establishing credit and making payments on time after a period of late payment behavior will definitely help to raise an individual's credit score over a period of time.
10% of Your Credit Score Equates to Types of Credit Accounts
Do you have a "healthy" mix of credit? This score will consider your mix of credit cards, installment loans, retail accounts, finance company accounts and mortgage loans. Its not necessary to have one of each, and its not a good idea to open credit accounts that you actually have no intentions of using. The credit mix usually won't be a key factor in determining this score, but it will be a more important factor if your credit report doesn't have other available credit information on which to base a score on.
This score also takes into consideration what type of credit accounts that you currently have, and exactly how many you have of each type. The score also takes a look at the total number of accounts that an individual currently has. The number of accounts that are considered too many will vary depending upon that individual's overall credit picture.
15% of Your Credit Score Equates to Length of Credit History
How long has your credit been established? In general, a longer credit history will increase your score. However, individuals with short credit histories may get high credit scores, depending on the rest of their credit report.
This scoring takes into account the following conditions.
• How long your credit accounts have been established. The score considers both the age of your oldest account and the average age of all of your accounts.
• How long specific credit accounts have been established.
• How long it has been since you used certain accounts.
30% of Your Credit Score Equates to Current Amounts Owed
How much credit is too much? Having credit accounts and owing money on them does not mean that you are a high-risk borrower with a low credit score. However, owing a great deal of money on many accounts can indicate that a person is overextended and is more likely to make some payments late or not at all. Part of the science of scoring is determining exactly how much credit is simply too much for a given credit profile.
This scoring takes into account the following conditions.
• The total amount that is owed on all accounts. Even though you may pay off your credit cards in full every month, your credit report may show balances on all of those accounts. The balance on your last statement is generally the amount that will be listed on your credit report.
• All of the different types of accounts owned. In addition to the total amount that you currently owe, this scoring also considers the total amounts that you currently owe on specific types of accounts, such as credit cards, installment loans and the mortgage loans on property.
• The balances on certain types of accounts. In some cases, having a very small balance without ever missing a payment shows that you have managed credit responsibly, and may be slightly better than no balance at all. On the other hand, closing unused credit accounts that show zero balances and that are in good standing will not generally raise your score.
• The number of accounts that have balances. A large number of outstanding accounts can indicate a higher risk for individuals that are overextended.
• The total amount that is owed on revolving credit. How much of your total credit line is being used on credit cards and other "revolving credit" accounts. Someone who is close to "maxing out" their credit cards may possibly have a difficult time making payments in the future.
• The balances on installment loans. This scoring takes into consideration the amount that is currently owed on each installment loan account in comparison to the original loan amount. Paying down installment loans is a good sign that you are capable to manage and repay your financial obligations.
35% of Your Credit Score Equates to Personal Payment History
What is your track record? The first thing that any lender would want to determine is whether you have paid your past credit accounts on time. This is also one of the most important factors in the calculation of a credit score. However, late payments are not always an automatic "score-killer". A good overall credit history can outweigh one or two instances of late credit card payments. By the same token, having no late payments in your credit report doesn't mean that you will get a "perfect score". Your payment history is just part of the process that is used in calculating your overall score.
This scoring takes into account the following conditions.
• The payments on many different types of accounts. These will include credit cards (Visa, MasterCard, American Express and Discover cards), retail accounts (credit from stores), installment loans (generally with monthly payments), credit accounts with finance companies and home mortgage loans.
• All of the different types of accounts owned. In addition to the overall amount that you currently owe, this scoring also considers the total amount that you owe on specific types of accounts, such as credit cards and installment loans.
• Documented public records. Public records report events such as collections, judgments, bankruptcies, delinquent child support, wage attachments, liens and suits. All of these are considered quite serious. Older items will generally count less than more recent ones.
• The number of days a payment was late. Details on late payments, missed payments, public records and collection items specify how late they were, how much was owed, how recently they occurred and how many there are. A 30-day late payment does not contain nearly as much risk as a 90-day late payment. A payment that was 30 days late a month ago will count against you more than a 90-day late payment that occurred over five years ago. Accounts containing late payments will remain on your credit report even though you may have paid them in full and they are now closed.
The benefit of no late payments. How many of your accounts do not have any late payments? A good track record on most of your credit accounts will certainly increase your credit score and your ability to secure additional credit.
In Conclusion...
Regardless of your personal credit history, I would like to recommended that you check your free credit bureau reports every year to make sure that all of the information in those reports is accurate.
Identity theft can ruin an individual’s credit within a very short period of time. Even though you were not responsible for what took place by this unscrupulous thief, you will be totally responsible for correcting all inaccuracies in your credit bureau report. If you don’t check your credit bureau reports on a regular basis, you will have absolutely no idea if the information is correct. "An ounce of prevention is worth a pound of cure!"
