Things You Need To Know About Improving Your Credit Report
Understanding the workings of your credit score is necessary before you can improve your credit score. You need this information to effectively plan how to improve your score.
If you don’t understand how your credit score works, you will also be at the mercy of any
company that tries to tell you how you can improve your score – on their terms and at their price. In general, your credit score is a number that lets lenders know how much of a credit risk you are. The credit score is a number between 300 and 850 the will let potential lenders evaluate how good a credit risk you are and how well you repay your debts.
You are more likely to get credit at favorable rates if you have a high credit score because you are perceived to be a better credit risk. Scores in the low 600s and below will often give you trouble in finding credit, while scores of 720 and above will generally give you the best interest rates out there. Although credit scores are a lot like SAT scores and are meant as a snapshot they can be interpreted in many different ways by people. Many lenders put more emphasis on credit scores than others.
Some lenders will work with you if you have credit scores in the 600s, while others offer their
best rates only to those creditors with very high scores indeed. Some lenders will look at your
entire credit report while others will accept or reject your loan application based solely on your
credit score.
Credit scores are based on a history of your past debts and repayments. The credit bureaus use computers and mathmatical calculations to come up with the credit score that is present in your credit report.
Most bureaus use the FICO system but use their own method to compile your score which accounts for the fact that you will have a different score with each bureau. FICO is an acronym for the credit score calculating software offered by Fair Isaac Corporation company. This is by far the most used software since the Fair Isaac Corporation developed the credit score model used by many in the financial industry and is still considered one of the leaders in the field.
In fact, credit scores are sometimes called FICO scores or FICO ratings, although it is important to understand that your score may be tabulated using different software.
One other thing you may want to understand about the software and mathematics that goes into your credit score is the fact that the math used by the software is based on research and comparative mathematics. This a simple but very important concept and one you need to understand in order to boost your credit score. There are similarities in the principles used in the way insurance premiums and credit scores are calculated.
Your insurance company likely asks you questions about your health, your lifestyle choices
(such as whether you are a smoker) because these bits of information can tell the insurance
company how much of a risk you are and how likely you are to make large claims later on. This is based on research.
Many studies show that smokers are more prone to serious illnesses and will thus require more medical attention. Smokers as a group tend to face higher insurance premiums.
Similarly, credit bureaus and lenders often look at general patterns. People with too many debts have poor repayment histories and so if you have too many open credit lines your credit score may suffer.
Understanding this can help you in two ways:
1) It will let you see that your credit score is not a personal reflection of how “good” or “bad”
you are with money. Rather, it is a reflection of how well lenders and companies think you will
repay your bills – based on information gathered from studying other people.
2) It will let you see that if you want to improve your credit score, you need to work on
becoming the sort of debtor that studies have shown tends to repay their bills. You do not have
to work hard to reinvent yourself financially and you do not have to start making much more
money. You just need to be a reliable lender. This realization alone should help make credit
repair far less stressful!
The credit bureaus compile credit reports using information they get from their client companies. It works like this: credit bureaus have clients – such as credit card companies and utility companies, to name just two – who provide them with information.
Once a file is begun on you (i.e. once you open a bank account or have bills to pay) then
information about you is stored on the record. If you are late paying a bill, the clients call the
credit bureaus and note this. There are many things that can count as negatives on your credit report like overdue bills and other problems.
Information such as what type of debt you have, how much debt you have, how regularly you
pay your bills on time, and your credit accounts are all information that is used to calculate your credit score.
Things that don’t count toward your credit score are age, sex or income. The actual formula used by credit bureaus to calculate credit scores is a well-kept secret, but it is known that recent account activity, debts, length of credit, unpaid accounts, and types of credit are among the things that count the most in tabulating credit scores from a credit report.
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