Credit Scoring (continued)

Improving your Credit Score
Unfortunately for most consumers, the Fair Credit Reporting Act currently states that consumers have a right to all information in their credit file, except their credit scores.

The reason for this is, according to the FTC, credit scoring models are complex. For example, scores often vary among creditors and will be different even for different types of credit. So, if one factor changes, your score may change - but improvement generally depends on how that factor relates to other factors considered by the model. Only your creditor can explain what might improve your score under the particular model used to evaluate your credit application.

As a general rule, credit scores will usually range between 375 and 900 points. In mortgage lending, for example, 650-675 is very good. A score of 620-650 is okay but will probably require more scrutiny whereas below 620 may be approved but need more down or a higher interest rate. But understand, another industry such as car or department store may have a completely different criteria for "good" versus "poor".

How is the score generally measured?
Scoring models generally evaluate the following types of information in your credit report:

Do you pay your bills on time?
Payment history typically is a significant factor. Your score will be affected negatively if you have paid bills late, had an account referred to collections, had a repossession, or declared bankruptcy.

What is your outstanding debt?
Many scoring models evaluate the amount of debt you have compared to your credit limits. If the amount you owe is close to your credit limit, that is likely to have a negative effect on your score. Maintaining a low balance on multiple cards is better than high balances on one. Keep your balance under 30% of maximum as a rule. Also, don't run out for more cards just before applying for a loan because recent applications can penalize your chances of loan approval.

How long is your credit history?
Generally, models consider the length of your credit track record. An insufficient credit history may have a negative effect on your score, but that can be offset by other factors, such as timely payments and low balances.

Have you applied for new credit recently?
Many scoring models consider whether you have applied for credit recently. If you have applied for too many new accounts recently, that may negatively affect your score. However, not all inquiries are counted. Inquiries by creditors who are monitoring your account or looking at credit reports to make "pre-screened" credit offers are not counted.

How many and what types of credit accounts do you have?
Although it is generally good to have established credit accounts, too many credit card accounts may have a negative effect on your score. In addition, many models consider the type of credit accounts you have. For example, under some scoring models, loans from finance companies (rather than a bank) may negatively affect your credit score.

If you have questions about credit scoring, please contact us.

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