What is a Credit Bureau?

They are the businesses that create, store, and sell the information in your credit files. In the United States, there are three major credit bureaus or credit reporting agencies: Trans Union, Equifax, and Experian.

What exactly is a credit score?

A credit score is a number that is designed to provide a numerical assessment of an individual’s creditworthiness, which represents the perceived likelihood that an individual will pay their debts promptly. It is provided to financial institutions and other businesses by credit bureaus.

What is the best credit score?

The highest possible FICO score is purported to be 850, and the lowest score is 300.

What is a good credit score?

As with many things in life, it depends on whom you ask. According to Fair Isaac Corporation, the creators of the FICO scoring model, a score above 700 is good. However, for the purpose of getting a home loan, each lender has different guidelines, and you should consult with your bank or mortgage broker for more specific information.

What is the average credit score?

According to Fair Isaac, the median credit score is 725. However, only about 75% of the eligible population (over 18) have credit scores, so the data is incomplete.

Where can I get my credit score?

You can order your FICO credit score from myfico.com. Also, when you apply for a home loan, many mortgage brokers will provide your score if you ask them.

Where can I get my free credit report?

You are entitled to get one free copy of your credit report per year from each of the three credit bureaus. Go to www.annualcreditreport.com to order your free report. Note that there are many other sites where you can buy your report, but this site is the official site created to comply with the Fair Credit Reporting Act.

How will my credit score affect my home loan or mortgage?

When you apply for a home loan or mortgage, the lender will request a copy of your credit report and the accompanying credit score from one of the credit bureaus. The higher your score is, the easier it will be for you to get a home loan. Your credit score will also affect the interest rate that the lender offers you, which influences how much your monthly payment is.

How do they calculate credit scores?

The credit scores are generated based on statistical model based that incorporates the information contained in your credit report. There are several different categories of information. Such as Payment History, Amounts Owed, Length of Credit History, Types of Credit Used, and New Credit.

How do I improve my credit score?

There are many different ways to improve your credit score. However, it is important to understand that your credit score does not necessarily update immediately and that it may take time for any changes to updated on your report. The first step is to obtain a copy of your credit report. If there are any inaccuracies, then you will want to take the steps necessary to correct the information on your report. Some of the other things that you can do to improve your credit report are:

  • Pay down your credit card debts
  • Make sure you pay your bills on-time every month, especially credit cards and loans
  • Request to have your credit limits increased
  • Keep your oldest credit accounts open
  • Don’t apply for new credit cards too often

Credit Score Based On:

Payment history (35% contribution on the FICO scale) – A record of negative information can lower a consumer’s credit rating or score. In general risk scoring systems look for any of the following negative events; charge offs, collections, late payments, repossessions, foreclosures, settlements, bankruptcies, liens, and judgments. Within this category, FICO considers the severity of the negative item, the age of the negative items and the prevalence of negative items. Newer is worse than older. More severe is worse than less severe. Moreover, many are worse than few.

Debt (30% contribution on the FICO score) – This category considers the amount and type of debt carried by a consumer as reflected on their credit reports. There are three types of debt considered. Revolving debt – This is credit card debt, retail card debt, and some petroleum cards. Moreover, while home equity lines of credit have revolving terms the bulk of debt considered is a true unsecured revolving debt incurred on plastic. The most important measurement from this category is called “Revolving Utilization,” which is the relationship between the consumer’s aggregate credit card balances and the available credit card limits, also called “open to buy.” Expressed as a percentage and is calculated by dividing the aggregate credit card balances by the aggregate credit limits and multiplying the result by 100, thus yielding the utilization percentage. The higher that percentage, the lower the cardholder’s score will likely be. Closing credit cards is not a good idea for someone trying to improve their credit scores. Closing one or more credit card accounts will reduce their total available credit limits and likely increase the utilization percentage unless the cardholder reduces their balances at the same pace.

Installment debt – This is debt where there is a fixed payment for a fixed period. An auto loan is a good example as the cardholder is making the same payment for 36, 48, or 60 months. While installment debt is considered in risk scoring systems, it is a distant second in its importance behind the revolving credit card debt. Installment debt is secured by an asset like a car, home, or boat. As such, consumers will use extraordinary efforts to make their payments, so their asset is not repossessed by the lender for non-payment.

Time in the file (Credit File Age) (15% contribution on the FICO scale) – The older the cardholder’s credit report, the more stable it is, in general. As such, their score should benefit from an old credit report. This “age” is determined two ways; the age of the cardholder’s credit file and the average age of the accounts on their credit file. The age of their credit file is determined by the oldest account’s “date opened,” which sets the age of the credit file. The average age is set by averaging the age of every account on the credit report, whether open or closed.

Account Diversity (10% contribution on the FICO scale) – A cardholder’s credit score will benefit by having a diverse set of account types on their credit file. Having experience across multiple account types (installment, revolving, auto, mortgage, cards, etc.) is a good thing for their scores because they are proving the ability to manage different account types.

The Search for a New Credit (Credit inquiries) (10% contribution on the FICO scale) – An inquiry is noted every time a company requests some information from a consumer’s credit file. There are several kinds of inquiries that may or may not affect one’s credit score. Inquiries that have no effect on the creditworthiness of a consumer (also known as “soft inquiries”), which remain on a consumer’s credit reports for six months and are never visible to lenders or credit scoring models, are:

Inquiries that can have an effect on the creditworthiness of a consumer, and are visible to lenders and credit scoring models, (also known as “hard inquiries”) are made by lenders when consumers are seeking credit or a loan. Lenders, when granted a permissible purpose, as defined by the Fair Credit Reporting Act, can “pull” a consumer file to extend credit to a consumer. Hard inquiries can, but do not always, affect the borrower’s credit score. Keeping credit inquiries to a minimum can help a person’s credit rating. The other factor in determining whether a lender will provide a consumer credit or a loan is dependent on income. The higher the income, all other things being equal, the more credit the consumer can access. However, lenders make credit granting decisions based on both ability to repay a debt (income) and willingness (the credit report) as indicated by a history of regular, unmissed payments.