Understanding Credit Scoring and How It Affects You

How do credit bureaus compute a person's credit score

? Many credit reporting agencies gather information from a debtor's credit history and from public and private records that can be obtained. Creditors also frequently send information to these agencies, which is also used in the calculating process. While the exact formula is unknown, the general formula for calculating your score is based on certain categories that are weighted differently. The amount owed represents 30% of your score. If you are up to your eyeballs in debt as compared to your income, then you will have a lower score. 30% of your score is also calculated based on payment history. If you make payments on time each month and don't default on your obligations, your score will be good. If you miss payments or refuse to pay back creditors, your score will be low. The duration of your credit records affects 15% of your score. A long established credit history is better than no history. The types of credit used and the number of credit inquiries each account for 10% of your score. Credit cards are revolving debt. Mortgages, auto loans, student loans, etc. are considered installment debt. Installment debt is always better than revolving debt. If you have too much revolving debt, your score will suffer. Finally, if there are several new credit inquiries on your file then this too can influence your score.

Your score will range from between 300 to 850. While many consumers feel the score based system is unjust, experts argue that the system has provided responsible borrowers with loans at lower interest rates. The reason is that it is much easier for lenders to filter out the more risky applicants and provide better rates to good applicants, knowing those with high scores pose a lower credit risk. Basically, credit scores allows the lending industry to work more efficiently, which reduces costs and errors.

With good credit scores, you have access to better credit products. You get to pick and choose from among the best loan and credit card offers available. This is why it is so important that you improve your score. It saves you money and a lot of heartache. The credit agencies aren't out to get you. They simply exist to help lenders make better decisions. Start working on your own financial problems and you will see your credit situation improve. It really is just a matter of having the willpower and patience necessary to improve your own life.

Understanding Credit Scoring and How It Affects You

By: Alex Post

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