At Credit Repair Consultants, we believe that consumers should be empowered with as much information regarding their credit as possible. We created this comprehensive yet easy to understand section on credit scores in order that you may be better equipped at improving and maintaining your good credit and understanding how creditors actually view you.
This is the sane information that many other sites try to sell to you in the form of an e-book.
We provide this information totally free and will even email it to you for free if you wish.We realize that there are many myths circulating about “Credit Scores” so we want you to know the truth.
What your credit score means
When you are finished reading, you should know everything you need to know about your credit scores.First off, itis important to realize that most lending decisions nowadays are decided simply by looking at your credit score. Some decisions are even automatically generated by computer using preset credit score criteria. The days of lenders actually looking at the details of your credit report are long gone. Understanding how to obtain and keep a high credit score is vital to getting the credit you want and deserve.
In this section you will learn things like, what is a credit score, do I have more than one credit score, how come my credit score was different when I checked it and when the lender checked it, what it costs me to have a low credit score, how my credit score is calculated, how to improve my credit score, how to obtain my real credit score, important credit score facts, and even how to add positive accounts to my credit report and increase my credit score without actually having to qualify for new credit.
Introduction to credit scores
The company that created the scoring model used today by most lenders is called Fair Isaac Corporation and commonly known as FICO, for short. Fair Isaac Corporation is a California Company founded in 1956 by Bill Fair and Earl Isaac.
They pioneered the field of credit scoring for financial companies. They have expanded their enterprise to cover decision systems, analytics and consulting.
When the three major credit bureaus calculate your credit score using software from FICO, they come up with what is commonly termed, your “FICO Score”. Each credit bureau propriotizes their calculation of this score by giving it their own name.
What your credit score means.
The credit score rating system is meant to develop a snapshot of the risk you currently represent to a lender. Several parameters in your credit report, including payment history, length of account history, number of open accounts, loans, mortgages, public records, and others are formulated to produce a 3-digit score between 300 and 850. There are other scores used by lenders and insurance companies (some of which are developed by FICO) such as Application and Behavior scores. These other scores take other information into account. Usually a lender will use a combination of your credit score along with other factors, such as income, debt ratio, or current assets when determining your risk. They all have the same objective, to determine the borrower’s potential risk. Regardless of whether the score was generated by FICO or a system based on FICO parameters, they all yield an industry standard 3 digit score. This score usually places you in one of 3 main categories.
If your credit score is above 680, you are generally considered a lower risk and should have no problem getting a good interest rate on your home loan, car loan, or credit card.
If your credit score is below 680, you are average or “sub prime” risk, and will likely be offered less than favorable interest rates and terms on your loans and credit cards.
| Credit Status | Rate | Payment | Over 5 Years | Monthly Cost of Bad Credit |
| Good | 5% | $471.78 | $0.00 | $0.00 |
| Midly damaged | 8% | $506.91 | $2107.74 | $35.13 |
| Damaged | 12% | $556.11 | $5059.82 | $84.33 |
What it cost you to have a low score
If you are financing or looking to finance a car, having poor credit can mean higher down payments and over 200% higher interest rate. The higher interest shows up every month in a higher payment.
This example is based on financing $25,000 for 60 months.
Bad credit in auto financing can really hurt, but it is nothing compared to the cost of bad credit when a home is involved. A typical home can cost between $90,000 and $245,000 more in interest if you are buying the home with a low FICO score, as indicated below.
This example is based on financing $200,000 for 30 years, P.I. only.
In fact, in general, those with bad credit throughout their life will pay approximately $250,000 more in interest as opposed to those with good credit. This is why it is so important to obtain and keep a high score.
| Credit Status | Rate | Payment | Over 5 Years | Monthly Cost of Bad Credit |
| Good | 5% | $1037.64 | $0.00 | $0.00 |
| Midly damaged | 7% | $1330.6 | $92,506.23 | $256.96 |
| Damaged | 9% | $1755.14 | $245,339.76 | $681.50 |
How Credit Scores are Calculated
The methods of calculating your FICO credit score may differ slightly depending on the credit bureau. When obtaining your credit score from one of the Credit Bureaus it is important to understand that your score is not coming directly from FICO, rather it is adapted to each credit bureau’s report and is given its own name:
Equifax = Beacon Score
Trans Union = Empirica Score
Experian = Experian/Fair Issac Score
Your credit score is derived from your bureau data and is calculated each time it is requested and is not a permanent part of your credit file. Accordingly, it will change every time data on your credit reports change and may be slightly different each time it is requested. Since each credit bureau usually reports different information, your credit score from each credit bureau will also be different.
However your credit score is calculated, it will always take into consideration many factors or categories of information. No one piece of information determines your credit score and all of these factors are interrelated with one another. As the information in your credit report changes, the importance of one or several factors may change in your FICO score. Lenders may look at many things when making a credit decision, including your income and the kind of credit you are applying for. However, your FICO score does not reflect these facts, as it only evaluates the information retained by the credit-reporting agency.
Important Factors
Its difficult to say exactly how the credit score is calculated as FICO does not reveal the details of their model. We do know that it is largely based on the following factors.
- Payment History (Previous credit performance) = 35%
- Outstanding Debt (Current level of indebtedness) = 30%
- Amount of time credit has been in use (Credit history length) = 15%
- Recent Inquiries (Pursuit of new credit) = 10%
- Types of credit experience and credit in use = 10%
1. Previous Credit Performance (Payment History) 35%
A lender wants to know what your payment history is like. Have you paid everything on time, are you late on anything now, etc… Your payment history is usually the most important factor used in calculating your score. In fact, even just one 30-day late payment can have a tremendous negative impact on your score. This “negative history” is exactly what Credit Repair Consultants are dedicated to improving for you. Each time a negative item is removed from your credit it should have a positive effect on your credit score.
The credit experts near me at Credit Repair Consultants offer a free credit audit that is available to anyone in any U.S. state because the legislation that governs creditors, credit reporting, and credit bureaus is administered at the federal, not state level.
2. Current Level of Indebtedness (Amount Owed) 30%
Are your cards max-ed out? High balances, or more precisely, balances that are close to your credit limit can negatively affect your score.
The creditor wants to know, Can the borrower pay me and still afford to pay his other bills? These are the types of questions that most borrowers want to know and the answers are almost as important as your previous credit history.
The credit experts near me at Credit Repair Consultants offer a free credit audit that is available to anyone in any U.S. state because the legislation that governs creditors, credit reporting, and credit bureaus is administered at the federal, not state level.
3. Amount of Time Credit Has Been In Use (Length of Credit) 15%
The longer your accounts have been open, the better your credit score. This factor only makes up about 15% of your total credit score, however, so even young people and recent immigrants can still score high overall as long as their other factors are good. If you are new to credit your best bet is probably just to open an account and be patient. There is one technique that you may be able to use, however. We will discuss it in detail later. Just understand that the credit score takes into account these factors:
4. Pursuit of New Credit (10%)
Credit is much more popular today. Just look at the number of credit card offers you get via the mail and the Internet. Most consumers can now shop for credit and find the best terms for their situation. But every time you apply for credit of any kind, you create an inquiry on your credit report. Too many Inquiries negatively affect your score. Inquiries within the last six months are especially damaging and most inquiries will remain on your report for up to 2 years. Research shows that opening several credit accounts in a short period of time does represent greater risk and can lower your overall credit score. Fair Isaac Corporation has realized that several inquiries may be made when a consumer is shopping for one auto loan or mortgage. Recent adjustments have been made in the scoring process to account for what is referred to as “rate shopping” in these categories. A grouping of auto or mortgage inquiries — which probably represents a search for the best rate on a single loan — is treated as though it was a single inquiry. For instance: most auto loan inquires that are within 15 days of each other only count as one inquiry. And most mortgage inquiries that are within 30 days of each other only count as one. Your score takes all these factors into account:
5. Types of Credit Experience (10%)
Having a healthy mix of different types of credit accounts, such as installment loans, retail accounts (like store cards), major credit cards (Visa and MasterCard), and a mortgage is what is considered by this part of the score. This is usually not a key factor in determining your credit score but it can help a close score. It’s not a good idea to try and open different types of accounts just to try and make this factor better. It will likely reduce your credit score in other areas. You should never open accounts you don’t intend to use anyway. Your credit score will take into account: