The credit score is a system used by the 3 major credit bureaus (Transunion, Experian, Equifax)Â that helps 3rd party companies evaluate your risk. It essentially is a mechanism to determine your risk of default, and therefore, this system can also be used to set the terms that will set aÂ rate you will pay for a car, house, or bank loan.
This system collects information from your credit report on your previous credit experiences, such as your bill payment history, the amount and type of accounts you have, whether you are timely in paying your bills, collection actions initiated against you, outstanding debts and the seniority of your accounts. Using a statistical program, the credit grantors compare this information with the repayment history of loans from other consumers with similar profiles.
For example, a credit score system assigns points to each of the factors that serve to predict which candidates are most likely to repay a debt. The amount of points earned – that is, the credit score – helps you predict your ability to repay, that is, the likelihood that you will repay a loan and meet the payments by the due dates.
Some insurance companies use information from credit reports and also combine it with other factors to predict the level of probability that you will file an insurance claim and also to forecast the amount of the claim. Insurance companies can consider this information when making the decision to issue insurance and determine the amount of premium you will be charged. Credit scores used by insurance companies are also called “insurance scores” or “credit scores based on credit history.”
Credit scores and credit reports
Your credit report is a key element of many credit score systems. For this reason, it is essential that you verify that the information contained in your credit report is accurate. Federal law gives you the right to get a free copy of your credit reports every 12 months from each of the three credit reporting companies operating nationwide.
The Fair Credit Reporting Act (FCRA) also gives you the right to obtain your credit score from credit reporting companies operating nationwide. These companies are authorized to charge you a reasonable fee for your score. When you buy your score. They also give you information on how to improve it.
How do you develop a credit score system?
To develop a credit score model or system, credit grantors or insurance companies select a random sample of clients and perform a statistical analysis to identify risk-related characteristics. Then, they assign a value to each of the characteristics, the incidence of this value depends on the relevance that it has as a predictor element for the evaluation of the level of risk of a candidate. Each company can use its own credit score system, use different systems adapted to the different types of credit or insurance that it grants, or it can apply a generic model developed by a company specialized in credit scoring systems.
The Equal Credit Opportunity Act (ECOA) provides that in a credit score system, scoring factors that assess certain characteristics – for example, race, sex, marital status, nationality or religion of the applicant can not be used. The law allows credit grantors to use the age factor, but all credit scoring systems that include the “age” factor should give equal treatment to older applicants.
What can you do to improve your score?
Credit score systems are complex and may vary depending on the lenders or insurance companies and the different types of credit or insurance they offer. If a factor changes, its score can also vary – but generally, to achieve a better score, one must take into account the relationship of that factor with the other factors considered by the applied system. Only the company that uses the scoring system knows what could improve your score within the particular model applied to evaluate your application.
But generally, to calculate your credit score the scoring models consider the following information from your credit report:
–Have you paid your bills on time? Your payment history is an important factor. If your credit report indicates that you were late in paying your bills, that some of your accounts were sent to a collection agency, or that you ever filed for bankruptcy, your credit score is likely to be affected negatively.
–Are you at the limit? There are several scoring systems that evaluate the amount of your outstanding debt against your credit limit. If the amount of that debt approximates the credit limit you have been set, your credit score is likely to be negatively affected.
–How long have you had credit? In general, scoring systems consider the age of your credit records. An insufficient credit history can affect your score negatively, but this can be countered if you show that you make your payments on term and keep low-value debit balances.
-Have you applied for any credit recently? Many scoring systems take into account whether you have applied for credit recently by checking how many times “inquiries” have been made about your credit report. If you have recently requested to open too many credit accounts, this could have a negative effect on your score.
Not all inquiries or queries made on your credit report have a negative effect, for example, creditors’ inquiries to monitor their accounts or queries related to “pre-evaluated” offers are not considered negatively.
-How many and what type of credit accounts do you have? Although having credit accounts is generally considered a positive factor, having many credit card accounts can have a negative effect on your score. In addition, many scoring systems consider the type of credit accounts you own. For example, for some scoring models, loans from financial companies can have a negative effect on your credit score.
It may take some time to improve your score significantly, but it is possible to do so. To be able to improve your credit score on most systems – be sure to pay your bills on time, cancel outstanding balances and not incur new debts.
If you are denied credit or are not offered the best available rate due to inaccuracies recorded on your credit report, contact the credit reporting company to dispute inaccurate information.