Credit Score Basics

So now that you have your credit report on the up and up it is time to change your focus and look at the credit score. The credit score is calculated by the data that comes off you credit report.

Credit scoring was first developed in the 1950s, but it has become more complex over the past couple of decades. It is now a critical part of whether giving you money is worth the risk.

The three major credit agencies have developed a generic scoring system based solely on the information reported to them about an individual. Credit scoring is a scientific method that uses statistical models to assess your credit worthiness based on your credit history and your current credit accounts.

When you apply for a home loan, auto loan, credit cards and in some cases even employment, the offering company can order a copy of your credit report and credit score.

Each credit bureau has a common method for calculating their score but each credit bureau calculates its score for you based on the data in its system. There is no uniformity in how much information is collected or requested by each bureau. This is why you can receive different scores from each of the three bureaus.

A computer calculates the score, when requested, by using information from the individual's credit report, such as whether payments are being made on time and how much is owed.

Your credit performance is compared to others with similar profiles to determine your score. The system awards points for each aspect that helps determine who is most likely to repay a debt. A total number of points per credit score helps predict how likely it is that you will make payments on timw and repay the loan.

Credit scores range from 375 to 900 points. If you are looking for a home loan, car loan, refinance, etc., a score of 650 or higher indicate an excellent credit risk. Pretty much the higher the number the better your credit risk. The higher number will give you better rates and a shorter time to get your loan approved.

A score below 620 will more than likely keep you from getting the best rates, as you will be deemed as a greater credit-risk. As you can tell just a little difference in your credit score can make a very big difference. If you have a lower score the loan process will probably take longer and the terms won't be as good as compared to if you had a higher credit score.

The credit scoring system is far from perfect, but is being modified all the time. With the Fair Credit Reporting Act going into effect in September, people will actually have a better chance at being able to correct their credit history without having to pay to get their hands on their credit report.

All this is good news, but another month must pass by before it all finally becomes law. Until then get you can still work to get your credit cleaned up and lower your credit score. You will enjoy the final results...Because Money Matters

About the author:

James Mercer posts articles of interest to those wanting to learn more about the financial world the runs their life Monday-Friday at www.becausemoneymatters.blogspot.com

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