Credit Scores - Nearly Everything You Need to Know

How is it possible to get pre-qualified for a car loan without discussing your salary? Or to be approved for a mortgage at an interest rate that differs from your neighbors? Or get a personal loan online within a few minutes?

All this is possible with the use of credit scores.

Banks, financial institutions, landlords, and even your employer rely on your credit score to make decisions about financing, tenancy, and employment every day.

Credit scores came into wide use in the 1980s as computer costs dropped and their use exploded in business. Prior to this, lending decisions were based on human judgment which was both unpredictable and unreliable, in addition to being slow.

During this period, there was growing Congressional action arising from discrimination in housing that put pressure on institutions to remove the ambiguity and bias from the rating system. Legislation was passed in 1971 (FCRA) and again in 1977 (FDCPA) which forced Credit Rating Agencies (CRAs) to revise their rating procedures.

Initially a standard point system was developed that weighed various items on the credit report. This approach reduced human bias and sped the evaluation process. Eventually the point system was replaced by statistical modeling of thousands of reports covering numerous variables that focus on consumer payment histories. Considered a much better predictor of consumer credit behavior, all banks and financial institutions now rely on it. The obvious advantages are: more accurate predictor; extremely fast; highly objective; and very efficient.

Fair Isaac Company led the way with the first statistical model that quickly became the standard in the industry, called FICO. This was the industry's answer to Congressional legislation outlawing discrimination in the rating process.

How does it work?

Credit scores rely on Risk Factors. If you are placed in a high risk category, then your score will be relative to others in the same category. If you have a limited credit history, then you will be compared to others with similar credit histories.

Entries to your credit report are grouped into Score Factors which are used to calculate your score. A partial list of items that factored in are: number of loan and credit card accounts; total debt to income; payment history including late payments, foreclosures, bankruptcies, employment status, etc.. When declined credit, the bank must mention the specific score factors that resulted in the decision

Credit scores range from 300 to 850. The higher the score, the better your credit rating. There are three major credit bureaus (or reporting agencies): Equifax, Experian, and TransUnion. Since each has its own version of the FICO model, you literally have three credit scores. Typically, the banks will take the two highest or two lowest scores (depending on bank policy) into account when evaluating loan applications.

Any score above 720 to 750 is considered excellent, and anything above that is just providing a cushion.

A general guideline for scoring from your credit report is a follows:

• 35% from payment history. If you have any late payments, collections, charge offs, foreclosures, short-sales, bankruptcies, judgments, liens, etc., this will reduce your score. These are called negative entries to you credit report.

• 30% is based on utilization, or how your debt is distributed. For example, it is better to have several accounts with low balances than one or two accounts that are maxed out. A simple utilization formula is: Current debt / Credit limit. The lower that ratio, the better. Try to stay below 10%. For example, if your credit limit on your credit card is $20 thousand, and your current debt outstanding on the card is $5 thousand, then your ratio is 25% (5 / 20) which is too high. Either raise your credit limit, or reduce your debt.

• 15% from Established History. That is, the older your active accounts, the better. When first establishing credit, it would be helpful if you could be added as an Authorized User on another persons established account (generally done within the family, such as parents). This will enable you to acquire accounts that have been active for awhile, thus boosting your score.

• 10% Inquiries. The more inquiries regarding your credit report and score, the lower your score becomes. Therefore, try to keep the number of authorized inquiries to a minimum

• 10% Mix of Credit. Here it is good to use different forms of credit: revolving credit, installment loans, mortgage, auto, etc. Try to keep an equal balance amongst the differing forms of credit.

The author is an accomplished internet marketer; employing both PPC and SEO techniques in various market niches, including credit, foreclosures, money management, etc.. You can also check out his latest website on Free Credit Check which provides sources for credit reporting and credit scores, or Payday Loans No Credit Check for locating loans without a credit score requirement. Article Source: http://EzineArticles.com/?expert=R._Dodger

Free Credit Report Online - What You Need to Know

For many concerned about their credit, there is confusion between the credit score and the credit report.

First, the credit score is derived from your credit report. In fact, it is likely that you will have three separate credit scores reflecting the information on your credit report from the three main reporting agencies: Equifax; Experian; and TransUnion. Since their information can be different, their scores will differ as well. This is why lending institutions will consider all the scores (based on their internal policy).

Second, you are entitled to get your credit report for free at least once a year. This can be done online with any of the three reporting agencies mentioned above. And, it is good practice to spread the request for each over 4 months to keep track of your credit history. That is, request a report from Equifax; then 4 months later, request a report from Experian; and then 4 months later, from TransUnion. All free reports.

And third, your focus should be on correcting any errors in your report. Removing errors will have an immediate positive impact on your credit score. Once that is done, then you would want to get your credit score if you are planning to obtain financing. The credit score will provide you with an idea of the cost you may face when seeking financing; such as, planning to get credit or a loan, or to renegotiate interest rates.

The other confusion is the cost for obtaining the credit score. Unlike the credit report (which is free once every 12 months per agency), the credit score is not free if you request it from the agencies directly. Some have applied to services that offer the credit score (they generally charge approximately $15 monthly). Understand that a service generally has a 7 day trial, after which you will be billed monthly until you cancel the subscription.

If you've applied for financing, the institution you've applied to will generally provide you with your credit scores from the three agencies cited above at no cost, if you request it (whether you're accepted our not). It is, as mentioned above, best to know your scores before seeking financing.

Free Credit Report Online:
Now, onto more practical matters. It is not unusual, unfortunately, to have the credit agency claim that you have already received your free report, and then require payment for your request. Here are some suggestions.

First, if you are routed to an out of country customer service support line, request immediately to be routed to an in country support line. This will save tremendous frustration when trying to resolve the problem.

The problem typically occurs when using a service like AnnualCreditReport.com which may be sending erroneous request information to the reporting agencies (Equifax, Experian, TransUnion).

Second, when talking to customer service from any of the three reporting agencies, request to obtain the free report online. This will avoid the delay in receiving the report, and supposedly lost reports in the mail.

And third, when dealing with Equifax, which seems to have a majority of the free report problems, their manned support line (as of January 2009) is: (888) 265-8807. It is advised that whatever agency you deal with, that you try to locate the manned line (as opposed to an automated line) to resolve issues quickly.

The author has an MBA in Finance and extensive experience with financial institutions. You can also check out his latest website on Free Credit Check which provides sources for credit reporting and credit scores, or Free Credit Report Onlinefor understanding your credit report information and what you can do to improve your score. Article Source: http://EzineArticles.com/?expert=R._Dodger

Check Credit Score - What to Do and How to Do It

Let's address the immediate questions of What you can do to get your credit score. Then we'll look at specific issues and How to address them.

What To Do to Get Credit Score
Despite some misconceptions, requesting a credit score is not free. If you approach a service or any of the top three credit reporting agencies (CRAs), Equifax, Experian, or TransUnion, you will have to pay a fee for the credit score. Since the scores from each of the CRAs will be different, then you face three fees: one from each.

When you plan to apply for financing or renegotiate your current rates, knowing your credit score from each of the top three CRAs is advised prior to contacting the financial institution. However, if you've already applied then you can request from the institution to release the scores. This can be done regardless whether you've been accepted or not (if never hurts to ask), at it should be at no cost.

Also, you are entitled to receive a free credit report (not score) from each of the CRAs for free once each year. It is more important to keep track of your credit history by requesting a report so that you can correct errors and address credit issues. Understand that the credit score is derived from the credit report. Also, your credit history in each of the CRAs will be different requiring you to approach all three CRAs for their free report.

It is best to request your score or report directly with the CRA, rather than through an intermediary or third party or service, to avoid errors. It is not uncommon for report requests through a service to create issues in getting the report free if the service fails to deliver. Also, when contacting the CRA, request getting the report online to avoid delays and lost reports in-transit.

There are services available that will provide for you your credit scores (as part of the service). They charge a monthly (or annual) fee after a 7 to 30 day trial period. A service to consider would be a credit monitoring service to avoid identity theft.

Credit Issues: How to Address Them
Let's do in a Question and Answer format.

Q: What's the cheapest way to get my credit score?
A: Citi Identity Monitor appears to be the cheapest, at $4.95 monthly

Q: How long should I wait to check my credit score after closing several credit card accounts?
A: If you plan to close down one or more credit cards, it is suggested that you leave your oldest accounts active to maintain your credit score. Closing down the oldest accounts will adversely affect your credit score. Once an account is closed down, it should be reported to the CRAs within 30 days (monthly reporting). Therefore, you might want to wait at least 30 days, and perhaps 60 days to ensure the reduction in credit card accounts is both reported and recorded in your credit history by the CRAs.

Q: Can an employer reject me because of my poor credit score?
A: It is true that employers do check credit scores to analyze a person's creditworthiness. If the Terms of Service in the organization includes checking the creditworthiness of an individual for the purpose of hiring, firing, and demotion, then it is legal (this may vary from state to state). Your only right is to dispute the information on the credit report, which is why it is important to monitor your credit history.

Q: Who calculates my credit score?
A: There are three primary credit reporting agencies or bureaus (CRAs) that apply a derivation of the Fair Isaac Corporation formual (FICO). While most institutions rely on the FICO scores of the three agencies, many banks, mortgage companies, and lending institutions apply their own formula to better represent their specific lending criteria and measure of risk.

Q: What factors in my credit history (report) affect my credit score?
A: There are numerous factors in your credit history that impact your credit score (some of which are trade secrets). Some of the key factors are: payment history; debt to income ratio; credit mix; new credit; length of credit; etc.. If you're just establishing credit, start with a secured credit card (as opposed to an unsecured credit card). You may be charged an annual fee, but it may be the only way to establish credit. With a secured card, your credit limit is equal to the deposit you place in the account. Make sure to repay the balance within the due date each month to establish good credit payment history. After a while, you can apply for an unsecured credit card.

Q: How often can credit scores be checked without affecting the score?
A: For hard credit checks (by banks and lending institutions) used to consider an application for a loan, the CRAs will treat such inquiries as one request within a 30 to 45 day period. For other requests, like auto loans or credit checks for employment, each will have a negative impact.

The author has an MBA in Finance and extensive experience with financial institutions. You can also check out his latest website on Free Credit Check which provides sources for credit reporting and credit scores, or Check Credit Score for understanding your credit report information and what you can do to improve your score.. Article Source: http://EzineArticles.com/?expert=R._Dodger

Check Credit Report - Need to Know

What you don't know could hurt you, financially!

It is always a good idea to periodically check your credit report for errors and problems so that you can correct them. And, you are entitled to receive one free report from each of the credit reporting agencies (CRAs) each year. Who are the big three CRAs: Equifax, Experian, and TransUnion.

To get your free credit report online, contact each CRA though the Internet and request a credit report. There should be no charge. If there is, then phone the company for assistance. While there are services that will obtain the report from each of the three CRAs (saving you some time), there have been issues where the requested reports are not received, and yet the CRA will have your request on their database as being issued. The process to correct this is a lot of aggravation.

Here's a real case with a leading credit reporting service that provides credit reports from the top three CRAs.
"This is the second year I have used it [the service] and have had problems getting my Equifax report both times. I'm not able to do it online and when I call Equifax (I, of course, get someone in India), they try telling me I have already requested it and I will now have to pay for one.

I just about shouted at the guy today because he couldn't understand what I was saying, and I was confusing him by going off his script, and all he could do was keep telling me I have to pay for one. I tried explaining to him it's probably showing I requested it; however, I never received it so there's an error.

I think my cat would have understood me better, when I explained it to him, than the guy I was talking to! If not, at least he would have purred some for me!

I got the other two CR's with no problems; Equifax is the only one giving me grief. "

The problem was that the Service reported to the agencies that reports were issued, when in fact the Equifax report was not. This is why it may be safer to request your reports directly from each agency and avoid the middle-man (Service). Incidentally, this is not the only person who has experienced this problem.

Ok. Let's discuss what actually impacts your credit score; more specifically, the differences between hard and soft credit checks.

Whenever you request a credit card, or open an account at a store, or apply for a loan of any type, you have to give permission to the creditor to access your credit report. Are you aware that the inquiry could negatively impact your credit score? An inquiry occurs when another party examines your credit history and credit score. Hard inquiries affect your credit score negatively; soft inquiries will have no affect.

Soft vs. Hard Credit Inquiry
A Soft inquiry (also known as soft credit checks or pulls) occurs frequently without your permission. They occur under the following conditions:

• When you request it for yourself (note that requesting credit reports may be free; credit scores are not)

• Initial credit checks by credit card companies when soliciting your business. (This is when you receive that unwanted mail for new credit cards)

• Initial credit checks by loan companies for pre-approval on loans

• Employer inquiries when applying for a job, or in consideration for a promotion, etc..

• Insurance and credit card company periodic reviews for ongoing credit.

A Hard credit check or inquiry does impact your credit score negatively. It occurs under the following conditions:

• Applications for new credit cards or accounts

• Requests to activate pre-approved credit cards (those cards you have received in the mail that you decide to activate)

• Activation of new cell phone contracts (consider this when you decide to change plans)

• Opening a new checking or savings account at some banks and credit unions.

When you review your credit report, you will see entries for both soft and hard credit checks. If any hard credit checks are incorrect, contact your affected agency and have them remove the check (and see if you can have the impact on your credit score adjusted). And try to keep hard credit checks to a minimum.

The author has an MBA in Finance and extensive experience with financial institutions. You can also check out his latest website on Free Credit Check which provides sources for credit reporting and credit scores, or Check Credit Report for understanding your credit report information and ways to improve your credit score. Article Source: http://EzineArticles.com/?expert=R._Dodger