The use of credit scores goes back to the 1950’s, but it became prevalent during the 1980’s as a way for lenders to quickly and easily evaluate a potential borrower’s creditworthiness. Today credit scoring is used by lenders, insurers, landlords, employers, utility companies, and even judges, to evaluate your credit behavior.
There are many types of credit scoring models that exist today. Currently, Fair Isaac Corp’s FICO score and Vantage are two of the most widely used scoring models in the country. Credit scores are based on a mathematical formula and may vary a bit from the score your lender uses. However, scores should generally be in similar ranges and represent a comparable level of creditworthiness.
The basic credit scoring formula considers several factors from your credit report. The impact of each element fluctuates based your credit profile. They include:
* Payment History (40%)
* Depth of Credit (21%)
* Credit Line Utilization (20%)
* Account Balances (11%)
* New Recent Credit (5%)
* Available Credit (3%)
When you are preparing for a major purchase, make sure you check your credit scores and the reports from all three credit reporting agencies: TransUnion™, Equifax™, and Experian™. Looking at your scores and reports a few months before you complete a loan application will help you get a complete snapshot of your credit health.
For those worried about whether their credit is in good shape, understanding your credit and credit score is the first step. If your credit score is above 720, you will probably qualify for a preferred loan or credit card program. Scores under 650, may mean you could have difficulty qualifying for new credit and you’re more likely to pay higher interest rates.
If your credit score is a little low, here are some general actions that may help increase your credit score; pay your bills on time, reduce your debt, remove inaccuracies, and avoid new inquiries for a few months. Also, don’t forget that your credit score may not be the only factor a lender may look at when they are evaluating you.
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