The following article contains many questions about credit scores and the answers not only educate you on the basics of credit scores but also show you how to improve your score.

What Is A Credit Score?

A credit score is a number computed by a credit bureau and used to indicate how likely a consumer is to pay back a loan. Your score is computed by a computer program (also referred to as a mathematical or computer "model") that takes certain data from your credit bureau file and uses that data to calculate your score.

Each of the three credit bureaus computes your score using a similar computer model. The model was created by the Fair, Isaac and Company, Inc., (hence the term "FICO" score) and is sold to the three major credit bureaus for their use with their data. If the information about you at all three credit bureaus is the same, then your score from each of the three bureaus should be essentially the same.

However, the information about you can be different at the three bureaus.

What Type of Data is Used to Calculate My Credit Score?

Your credit score is based on credit-related information-both positive and negative-in your credit-bureau file, including:
· Payment history
· Outstanding debts
· Credit history
· Inquiries and new account openings
· Types of credit in use

What Type of Data is NOT Used to Calculate My Credit Score?

Your credit score is not based on information about your race, color, national origin, religion, gender, marital status, or age. It also doesnt use information about your income or assets. However, income, assets, and other factors are used in other ways by lenders to help them decide whether to lend you money.

Why Would My Data Be Different at the Three Credit Bureaus?

Different lenders-such as credit-card companies, stores, finance companies, landlords, utility companies, etc.-report to different credit bureaus. Some report to all three; some to only one or two. So its possible that each of the three bureaus might have different information about you. Its also quite possible that one or more of the three bureaus has incorrect information about some of your accounts. You should periodically (about once a year) get a copy of your credit report from each of the credit bureaus and check them for accuracy. If you find an inaccuracy, you should immediately request that it be corrected. Your credit report should have information about how to request corrections.

Or, you can contact the credit bureaus at the addresses and telephone numbers below:
· Equifax Information Services, LLC
PO Box 740241
Atlanta, GA 30374
800-685-1111
www.equifax.com

· Experian
701 Experian Pkwy.
PO Box 949
Allen, TX 75013
888-397-3742
www.experian.com

· TransUnion LLC
Consumer Disclosure Center
PO Box 1000
Chester, PA 19022
800-888-4213
800-916-8800
www.tuc.com

Who Uses Credit Scores?

Lenders, including credit-card companies and mortgage companies, use credit scores to help them decide whether lending you money would be a good risk for them. They also use other information about you, such as your income, assets, debt-to-income ratio, employment information, etc., to help them make a decision.


Why Is It Important to Have a Good Credit Score?

Based on the above data, you can understand why a lender is more willing to lend money to someone with a higher credit score-the lender is less likely to lose money. So, if you want to borrow, it is in your best interests to have a good credit score.

Its not that you cant get a loan if you have a low credit score; its just that if you do, youll likely have to pay a higher interest rate. Why? Because, statistically, the lender is more likely to lose money on you-you are statistically more likely not to pay back the loan as agreed upon.

What Can I Do to Improve My Credit Score?

So, how do you improve your credit score? While there is no "guaranteed" formula for doing so, obviously the better your payment record, the better off youll be. Lets look at some things you can do:

1. First, get a copy of your credit report from all three credit bureaus. Because your score is based on the data in your files, you should make sure that the data is accurate. Request that any incorrect data be corrected. Then follow up by getting another copy of the report to make sure that it has, indeed, been corrected.
2. Request that all three bureaus not accept unauthorized inquiries. Many credit card companies, finance companies, etc., inquire about your credit history. Thats why you get those "pre-approved" credit card and home equity offers in the mail. However, those inquiries can hurt your credit score. Similarly, you should not apply for a bunch of credit cards or credit lines, especially if your credit history is not good or you have a lot of debt and are likely to be turned down. That can also hurt your credit score.
3. Be sure to have established a credit history-a good one! If you can, you should have about three credit cards that you pay the minimum on-on time-every month. If you dont have any credit cards or loans, that can hurt your score, too. So can too many. If you dont quality for a regular credit card, apply for a "secured" card. With a secured card, you put money in an account and get a credit card with a limit based on a percentage (sometimes 100%) of that amount. Your payment history on the card is reported to the credit bureau and helps you establish a payment history. NOTE: Debit cards do not help you establish a credit history because they work like checks drawn against your checking account.
4. Minimize finance-company loans. Its better not to have any.
5. Keep up your good payment record. Dont slack off. The longer you pay on time, the more points you get. Your payment history and current payment pattern are important.
6. If you have derogatory public information (bankruptcy, foreclosure, collections, etc.) in your file, the more time that has passed, the better. Better yet, dont do anything that will result in that type of derogatory information in your file.

There are also several websites available to consumers which monitor their credit report as changes occur. Some websites only issue you your credit score or report, however, their are websites which offer packages that offer help to repair your credit. There are websites that offer "what if" scenarios. In other words, a consumer can go to the site and type in a hypothetical payment to a particular credit account of theirs. Then, the program will estimate how significant of an impact that payment may have if the customer were to make that move. Also, other programs will contact a customer by e-mail when any changes happen to their report, so they can see how and where their credit is being hurt, or helped depending on the action. These are invaluable tools for ANY consumer, including mortgage and lending professionals. For right around $10 a month individuals can obtain powerful tools to monitor, maintain, and strengthen their credit reports and credit scores.

When trying to decypher the credit mysteries its important you work with someone who is knowledgable. Otherwise it can be like the blind leading the blind. Make sure your mortgage professional is well versed in less then perfect credit loans as well as "A" paper.

The credit reporting agencies keep their scoring formulas secret, however, there are some rules of thumb for you. For one, the number of credit card accounts you have open, the credit limit, and how long they have been open affect your score. It seems to be best to have at least 2 but not more than 3 credit cards. Mastercard and VISA are better than store credit cards. It is best if the credit limit on one card is at least $5000. The longer the accounts have been open, the better, up to 7 years .

 

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