Understanding The Importance Of Your Credit Score (DOC)

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Understanding The Importance Of   Your Credit Score

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Credit scores are become a more and more important factor in our society.
Now a days it is often used in determining prices for both auto and
homeowner insurance. Many employers reserve the right to do a credit
check of job applicants, in the same manner they reserve the right to
drug test potential employees. The fact is that your Credit Score is

credit score, establish credit, rebuild credit, repair credit, imporve
credit score, Equifax, Empirica, Experian, TransUnion

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As recent as a few years back, the term "Credit Score" was not very
commonly used in our society. While there were who understood the term
and its purpose, the mass majority, although realizing that there was a
system out there that their credit, they did not have a term to stick to

Today, however, due to a number of factors such as increase Identity
Theft and mass media marketing campaigns there are very few who are not
aware of the term Credit Score. The goal of this article is to add
understanding on the personal to the recognition of that term.

A Credit Score is a number between 300 and 850 based on a statistical
analysis of an individual's credit activity. It is used to represent the
credit worthiness of an individual. How likely that the individual will
pay his or her debts. A credit score is based on their credit report
information which is typically sourced from credit bureaus and credit
reference agencies, typically from the three major credit bureaus.

Lending institutions, such as banks, finance companies, mortgage lenders,
and credit card companies, use an individual's Credit Score to evaluate
the potential risk posed by lending money to that individual. Lenders use
Credit Scores to determine who qualifies for a loan, at what interest
rate the loan is issued, and what credit limits are determined.

The use of credit scoring prior to granting credit is a trusted system
throughout the industry. Credit scoring is not limited to banks, however.
Organizations, such as mobile phone companies and government departments
employ the same techniques.

While there are many others, such as NextGen, VantageScore and the CE
Score, The most widely known score in the United States is FICO, which is
most widely used in the mortgage industry. FICO is an acronym for Fair
Isaac Corporation, the company that provides the most well-known and most
widely used credit scoring system in the United States.

The FICO score is calculated by applying statistical methods, developed
by Fair Isaac, to information in one's credit file and is primarily used
in the consumer banking and credit industry. FICO scores show how likely
it is that a borrower will default. No public information is available to
determine what the scores mean in terms of statistics. A separate score,
BNI, is used to indicate likelihood of bankruptcy.

As stated, banks and other lending institutions use Credit Scores as
factors in their lending decisions. Whether credit is denied or approved,
what interest is charged, what income level and asset verification is
required is all based on an individual's credit score.

The FICO score actually uses slightly different scoring methods to rate a
consumer's suitability for three different types of credit; mortgages,
auto loans, and consumer credit. Each reflecting the different credit
risks of these various types of lending. It is not unusual for these
scores to differ by as much 50 points or more for the same borrower.

There are three major credit reporting agencies in the United States.
Although often times inaccurately referred to as "credit bureaus", these
agencies; Equifax, Experian and TransUnion, also calculate their own
credit scores. These additional scores differ depending on what they are
meant to predict, what statistical methods used to determine a score, and
what information is used and how it is weighted.

These additional Credit Scoring Systems are numerous and are agency
specific. For example, Beacon, Beacon 5.0, Beacon 96, and Pinnacle scores
are available only from Equifax. Empirica, Empirica Auto 95, Precision
Score, and Precision 03 are available only from TransUnion. And, Fair
Isaac Risk Score at Experian.

These various Credit Scores are developed for the different agencies by
Fair Isaac, each differs and are periodically updated to reflect current
consumer repayment behavior habits. The NextGen Score is a scoring model
designed for consumers.

In an effort to make credit scoring more consistent across the board, in
2006 the big three credit reporting agencies introduced Vantage Score.
Vantage Score uses a different number range from the FICO score. It
ranges from 501 to 990 and also assigns letter grades from A to F to
specific ranges of scores.

A consumer's Vantage Score may differ from agency to agency, but the
difference would be entirely due to differences in the information
reported to the various agencies, not due to differences in scoring
systems. Since FICO is still widely used by lenders, the agencies
continue to offer FICO scores (or their closest equivalent) as well.

Most credit scores use a multiple-scorecard design. Each version may use
individual scorecards, and an individual potential borrower is typically
compared with other previous borrowers. In other words, a borrower with
one 30-day late payment will be scored against a population with some
similar delinquency. A borrower with two 30-day late payments will be
scored against a population with like credit faults. The individual is
then graded according to which variables indicate a risk within that

Nearly all large banks also build and use their own systems for credit
scoring purposes, and are often times in conjunction with outside scoring

The systems used to generate credit scores are subject to federal
regulations. The Federal Reserve Board's Regulation B, which implements
the Equal Credit Opportunity Act, expressly prohibits a credit scoring
system from considering any "prohibited basis" such as race, color,
religion, national origin, sex, or marital status. It also stipulates
that credit scoring systems must be "empirically derived" and
"statistically sound".

In addition, if an adverse action, a denial of a credit application, is
taken as a result of the credit score then the specific reasons for the
denial must be provided to the individual denied. The statement "credit
score not high enough" is insufficient. The reasons for denial must be
specific; "too many delinquencies 60 days or greater" and such.

Credit scores are designed to measure the risk of default by taking into
account various factors in a person's financial history. Although the
exact formulas for calculating credit scores are closely guarded secrets,
the Fair Isaac Corporation has disclosed the following components and the
approximate weighted contribution of each:

<ul type="disc">
      <li>35% punctuality of payment in the past (30 Days Past Due)</li>
      <li>30% the amount of debt, expressed as the ratio of current
revolving debt to total available revolving credit</li>
      <li>15% length of credit history</li>
      <li>10% types of credit used</li>
      <li>10% recent search for credit and/or amount of credit obtained

These percentages offer a limited guidance in understanding a credit
score. For example, the 10% of the score allocated to "types of credit
used" is undefined, leaving consumers unaware what type of credit mix to
pursue. "Length of credit history" is also a murky concept; it consists
of multiple factors two being the oldest account open and the average
length of time an account has been open.

Interestingly, although only 35% is attributed to punctuality, if a
consumer is substantially late on numerous accounts, his score will fall
far more than 35%. Bankruptcies, foreclosures, and judgments affect
scores substantially, but are not included in the very vague pie chart
provided by Fair Isaac.
A FICO score generally has a max of 850 and a minimum of 300. It exhibits
a left-skewed distribution with a median around 723. The performance of
the scores is monitored and the scores are periodically aligned so that a
lender normally does not need to be concerned about which score card was

Because the three major credit agencies have their own, independent
databases, each of us actually has three credit scores for any given
scoring system. As these databases are independent of each other, they
may contain entirely different data. Many lenders will check an
applicant's score from each bureau and use the median score to determine
the applicant's credit worthiness.

As a result of the FACT Act (Fair and Accurate Credit Transactions Act),
each legal U.S. resident is entitled to one free copy of his or her
credit report from each credit reporting agency once every twelve months.
To guard against inaccurate information or fraud more often than yearly,
one can request a report from a different credit reporting agencies
available on the net.

This information is available from a number of websites across the net
that offer an free credit report and use of their services for 30 days.
After which, there is a monthly fee involved. The fee is nominal compared
to the necessity of protecting your credit in today's highly
technological society where identity theft is becoming more prevalent.

In a time where identity theft and credit fraud in on the rise, the fee
these firms charge seems like a small amount to pay to protect your
credit and your good name. Having a good Credit Score is becoming more
and more prevalent in our society. Here are a few examples of how:

In September 2004, TXU (a Texas utility company) announced it would begin
setting individualized electricity prices based on credit score. However,
due to negative press and pressure from the Texas Public Utility
Commission, the plan was not implemented.

Credit scores are often used in determining prices for auto and homeowner
insurance. Recently, some of the agencies that generate credit scores
have also been generating more specialized insurance scores, which
insurance companies then use to rate the quality of potential customers.
These scores are unavailable to consumers.

Many employers reserve the right to do a credit check of job applicants,
in the same manner they reserve the right to drug test potential
employees. The fact is that your Credit Score is important. Rebuild-
Credit.us is a sight committed to providing consumers with quality
information concerning credit, how to get it, and how to maintain a
quality credit score. It is recommended you take the time to visit them
and read through the numerous articles and reports there.

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