Many people are on the constant hunt to have a great credit score, or even improve the credit score that they have.
Although this is a worthy cause, it is important to start your journey of obtaining excellent credit by understanding the way credit really works.
Once you are familiar with the way the credit report system works, you would be better equipped in how to dramatically increase your score, as well as maintain the high score you have managed to obtain.
So, what is the credit report system and how does it work.
Great questions, and I am about to tell you just that.
First of all, your credit score is a number that represents your credit risk based on a number of different factors.
These credit scores range from 300 to 850, and the national average is right around 675.
The reason this number is so important is because it is a gauge that lending institutions use to determine the likelihood of you paying your debt in a timely fashion.
To get a little more specific, the score that you are given is based on the last 24 months of credit history, and using those historical facts, the credit report system determines the likeliness of you paying your account 30 days past due within the next 90 days.
That sounds confusing, but it is really quite simple.
Here is an example.
If you are late on your payment this month, but have not been late over the last 24 months, your score will be impacted because the chances of someone having a late payment within the next 90 days is greater than someone who has never been late.
However, the impact is far less than someone else who has been late several times within the last 24 months.
You can imagine that the higher your credit score, the lower credit risk you are and the more likely you are to be given credit at low rates.
That is absolutely true.
Also, credit scores in the low 600s and below will often have problems obtaining credit, while scores of 720 and above will usually give you access to the best interest rates available.
I like to say that once you reach a 720, you are like Noah, where the seas parted before him.
Well, lenders will start parting for you! So let's also talk about how these credit bureaus arrive at your score.
There are three main credit bureaus, Equifax, Transunion, and Experian, and each of them use different methods to arrive at your score.
Most credit bureaus use the FICO system, which comes from its developer Fair Isaac Corporation Company.
This is by far the most used software since the Fair Isaac Corporation developed the credit score model used by many in the financial industry and is still considered one of the leaders in the field.
Using the FICO system, the credit bureaus and lenders are quickly able to see patterns in your credit, and then the system will provide them a score based on the finding.
Credit reports are compiled by the credit bureaus, which ultimately use the information from lending institutions and other agencies that provide your credit information to the bureaus.
The type of information that is collected and factored into your score include the balance on your accounts, how many accounts you carry, the length of time that you have had established credit, the mixture of credit types, late payments, and credit inquiries.
As you can see, there are many factors that are included to determine your credit scores.
There are also some important things to take note of.
Your age, sex, and income do not count towards your credit score.
One can never know exactly how the credit scoring model works, however, the more information that you consume regarding credit, the easier it becomes to maintain excellent credit.
Knowing this information is critical in not only establishing and managing your credit, but also repairing it.