You Need To Understand How Credit Reporting Agencies Assign Credit Scores

As the saying goes, there’s strength in numbers, but your personal credit score tells lenders about your payment history and has the biggest impact on whether you are able to buy that new car or not. While gaining credit is largely a numbers game, local experts say that there are several common sense guidelines consumers can use to add muscle to their creditworthiness. In considering this aspect, one must consider that the most important factors in a lender’s decision are based on the seemingly magical number between 300 and 850 that is given to your credit score.

The credit score was initiated in the 1960s by FICO (Fair Issue Corp.) as a way of alerting lenders of potential client risks. One of the most influential parts of their program included citing a client’s poor payment history. That one aspect alone will weaken a credit score faster than anything else. “Your credit report carries your last two years of credit history,” said Mike Cherry, president of Consumer Credit Counseling Services in Springfield, MO. “If you start paying your bills on time today, and you haven’t been for a year, in 24 months, that bad payment history will fall away.” CCCS is a not-for-profit organization that provides budget counseling and financial education services, as well as, debt management for people without sufficient income to make full monthly payments to unsecured creditors. Another key aspect is debt-to-credit ratio — the amount of debt a person has compared to their total credit limit on all revolving credit, such as credit cards and home equity lines of credit. About 30 percent of a credit score is based on debt-to-credit ratio.

“The most important things would be to make payments on time, but the second is to make sure that your outstanding debt on your revolving lines of credit is 50% or less,” said Marita Thomas, vice president of commercial lending for Empire Bank. “If you’re maxed out on a credit card, you’ll probably be over when the interest is added at the end of the month — and that carries a lot of weight.” Other factors in a credit score include the number of active accounts — too many accounts can be detrimental — and the length of credit history. In general, the longer your credit history, which accounts for about 15 percent of your credit score, is, the better — and be advised that the number of active accounts weighs in for about 10 percent. The remaining 10 percent is based on the mix of credit types.

So, while you now know what determines your credit score, you may choose to check your score annually. To do this you can log onto annualcreditreport.com, which was created by a 2005 federal law and allows anyone to check their credit score once a year for free. There are currently three credit bureaus that allow you to track your report, however, they will not provide you with your credit score; they are Experian, Equifax, and TransUnion. While the three reports vary, consumers should start by retrieving one and space out the others throughout the year giving you free access to your accounts three times. If you find discrepancies or errors in a credit report, consumers can contact the bureaus to remedy them. You can get your credit score from any of the above agencies for a fee.

[tags]credit score, credit report, Equifax, Experian, TransUnion, free, payment history, credit cards, revolving credit, credit limit, debt-to-credit-ratio,Credit bureaus, credit reporting agencies[/tags]