Where Do Credit Scores Come From?

If you are going to increase your credit score, then wisdom has it that you must grasp and know your credit score is and the way it works. Without this information, you won’t be ready to increase your credit score, because you won’t appreciate how the things you do in daily life affect your credit score.

If you don’t learn the way your credit rating works, you will be at the mercy of anyone that tries to tell you how you can increase your credit score – on their terms and at their price. Normally, your credit score is a number that lets banks determine how much of a credit risk you are. The credit score is a number, usually between 300 and 850, that lets lenders know how well you are paying off the money you owe and what kind of of a credit risk you are. Usually, the higher your credit score, the better credit risk you make and the more likely you are to be granted credit at very good interest rates. Credit scores in the low 600s and lower will often give you difficulty in securing credit, whereas scores of 720 and above will normally provide you with the best rates of interest around. However, credit scores are a lot like GPAs or SAT scores from college days – while they give other people an immediate picture of how you are doing, they are interpreted by people in different ways. Some lenders put more emphasis on credit scores in comparison to others. Some lenders will work with you when you’ve got credit scores in the 600s, while others give their best rates only to those with high scores. Some banks will look at your entire credit report while others will accept or reject your loan application based solely on your credit score.

The credit score depends on your credit report, which contains a history of your past debts and payments. Credit bureaus use computers and mathematical computations to arrive at a credit score from the data found in your credit report. Each credit bureau uses different methods to do this (which is the reason you will have different scores with different companies) but a lot of the credit bureaus utilize the FICO system. 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 likely to be called FICO scores or FICO ratings, even though it is valuable to recognise that your score may be tabulated using different software.

Another thing you may want to know 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 is an essential and simple concept that can help you discover how to increase your credit score. In simple terms, what this indicates is that your credit score is in a way assessed on the same principles as your insurance premiums. Your insurance company likely asks you questions regarding your health, your lifestyle choices (such as whether you are a smoker) because these pieces of information can tell the insurancecompany the amount of a risk you are and just how likely you are to make large claims later on. This is influenced by research. Studies have shown, for example, that smokers are usually more vulnerable to serious illnesses and so require more medical help. If you are a smoker, you may face higher insurance premiums because of this.

In a similar fashion, credit bureaus and banks often look at general patterns. Since individuals with too many debts usually do not have great rates of repayment, your credit score may suffer if you have too many debts, for instance. Understanding this can assist you in two ways:

1) It will help you to realize that your credit score is not an individual 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 – determined by information collected from studying other people.

2) It will let you see that if you want to increase 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 need to work hard to reinvent yourself financially and you do not have to start making much more money. You simply want to be a reliable borrower. This realization alone will help make credit repair far less traumatic!

Credit reports are put together by credit bureaus, which use information from client companies. It works like this: credit bureaus have clients – such as credit card issuers 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 regarding you is stored on the record. When you are late paying a bill, the clients call the credit bureaus and note this on your report. Any unpaid bills, overdue bills or other problems with credit, count as “dings” on your credit report and affect your score. Information such as what sort of debt you have, the level of debt you have, how regularly you pay your bills on time, and your credit accounts are all information that is used to assess your credit score.

Age, sex, and income do not count for your credit score. The actual formula used by credit bureaus to determine 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 on the list of things that count the most in tabulating credit scores from a credit report.

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