The Inside Workings of Credit Scores

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The Inside Workings of Credit Scores

Written By: David Reed

Consumers are encouraged to check their credit reports once per year. The primary reason for doing so is to make sure there arent any mistakes. Unfortunately, credit reports are prone to contain mistakes. Its not really the fault of the three main credit repositories, Equifax, Experian and TransUnion because all three are just a database. Whatever is reported to them is what you see. Further, someone with a similar name can show up on someone elses report. If youre not the only Bob Smith in town, this is certainly possible.

Someone elses poor credit might very well be showing up on your report which can directly damage your credit scores. When you find an error work with your loan officer to get it fixed. Your loan officer has working >

But have you ever wondered how these scores are calculated in the first place? They follow an algorithm first developed by The FICO Company years ago. For a while, credit scores werent the primary force behind a credit decision but over time the impact of a credit score became more and more important. Most every loan program available today has a minimum credit score and if a score falls below the minimum, theres some additional work that needs to be done to get those scores back on track.

There are five characteristics of your credit history that make up your three-digit score:nbsp; your payment history, account balances, how long youve had credit, the types of credit used and how often youve applied for new credit over the past couple of years.

Credit scores range from 300 to 850. Lets say a borrower has a credit score of 600 but needs a 620 to qualify for a particular loan program. Credit scores will improve much more quickly by paying attention to the two categories that have the greatest immediate impact on a score- payment history and account balances.

Payment history accounts for 35 percent of the total score and account balances 30 percent. When someone makes a payment more than 30 days past the due date, scores will fall. An occasional "late pay" wont really do much damage to a score but continued payments made more than 30, 60 or 90 days past the due date definitely will. By stopping the late payments scores will begin to recover.

Account balances compares outstanding loan balances with credit lines. If a credit card has a 10,000 credit line and there is a 3,300 balance, scores will actually improve. The ideal balance-to-limit is about one-third of the credit line. As the balance grows and approaches the limit, scores will begin to fall and fall even more should the account balance exceed the limit. This category contributes 30 percent to the total score.

The remaining three have >



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