A credit score can make or break the future of your borrowing status. It is important to know what it is, where you stand and how to prevent bad credit. A credit score predicts the statistical chance of a consumer being 90 days late or more on a particular loan obligation over the next two years. The higher the score is, the less chance that the person will be late.
Before a lender will give you money, he or she will look at your credit score in order to evaluate the potential risk in lending you money. For example, if your score is 800, your odds of being 90 days late or more in the next two years are approximately one in 1,300. That means that out of 1,300 people with scores of 800 or more, statistically only one of those people will be 90 days late or more in the next two years. Because the odds are with you, your interest rate will be better than if you were to have a score of 600. With a score of 600, your statistical odds for being 90 days late or more over the next two years are approximately one in eight. A lower FICO score could cost you hundreds of thousands of dollars more score over the 30 years of your loan.
So how does Fair Isaac come up with this rating system? Fair Isaac took one million TransUnion, Experian and Equifax credit reports and followed them for a two year period. Then after two years, they compared the new reports to the older ones. The idea was to see which reports had records of paying 90 days late or more during that two year period. Let’s say out of that million there were 150,000 reports that showed delinquencies of 90 days or more.
Then Fair Isaac looked at those 150,000 reports to see what those people had in common. One common factor was high debt ratios on revolving credit cards. If they had available credit, they would have used it to pay so as to not be 90 days late. But they were late because they did not have available credit to pay the debt. However, having high credit card balances is ok as long as you have very high limits to support it. The ratio is most important, not the amount of debt. I have seen people with 720 credit scores and higher who have $150,000 dollars in credit card debt, but they had credit limits of $450,000 and were at only 33% of their limit.
Another commonality that Fair Isaac looked at for these 150,000 credit reports was inquiries. People who were desperate to pay their debts had to apply for more credit, causing them to still be 90 days late or more. What makes your score go down is that you had something in common with the 150,000 people that had paid 90 days late or more. What makes it go up is that you were in lines with the remaining people who did not pay late.
Since each credit bureau collects different data on each consumer, you will have different credit scores with each bureau. The only credit score to be concerned with is the Fair Isaac Corporation’s classic FICO – the score that mortgage brokers pull when you apply for a home loan. The classic FICO credit scores range from 300-850. It is important to realize that there are many other scoring models out there that can give you an idea of whether you have great, good or bad credit. However, you might have a 725 with one of the other scoring models but have a 690 when a mortgage broker pulls your FICO score.
Credit scores are very important in determining your financial future. You want to stay on top of your payments and build a substantial credit history so as to keep your credit from slipping.
To learn more about how you can help increase your credit score, go to Dr. Alan Rosenthal's website at http://www.financialsolutionservices.com where you can find more great information on credit improvement. And, you are cordially invited to sign up for a FREE Credit Repair and Enhancement Workshop by visiting http://www.financialsolutionservices.com/upcomingevents.html For additional information listen to one of Dr. Alan Rosenthal’s credit talks at http://www.financialsolutionservices.com/credittalks.html
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