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FREE Credit Score Guide: Completely Understanding Your Credit Score
STEP 1 OF 3
Inside you'll find:

  The History, How Credit Scores Started

     What does your credit score mean?

       Do you fall into the Prime, sub-prime, or 
         shafted category?

         How much does a low credit score cost you?

           How are credit scores calculated?

             What factors affect your credit score?

               Cracking the code (bureau reasons for
                 credit denial)

                    Improving your credit score

                     Where to get help if you need it.

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Copyright 2007, 2008 MFH Enterprises, LLC,  Financial Help
What Is Credit Score All About?

History: A company in San Rafael, California was started in 1956 by Bill Fair and Earl Isaac. They began the practice of credit scoring for lenders. Every credit bureau, and most creditors, calculates your credit score using algorithms from bill and Earl's company (B&E) or their own software based on the their rating system.

What is a credit score? The credit scoring system is meant to present a snapshot of the risk you currently represent to a creditor. Several things in your credit file, how old is your credit history, how many open accounts you have, your loans, mortgages, public records, and others items are used to formulate a three-digit score with a minimum of 300 and a maximum of 850. Usually a creditor will use other factors in combination with your credit score to determine the risk you present to them. The credit score places you into one of three categories: Prime, sub-prime, and shafted.

Prime: If you have a credit score above 680, you are considered a "prime borrower". You will have no problems getting good interest rates on your home loan, car loan, or credit cards.

Sub-prime: If your score falls below 680, you become a "sub prime" borrower, and will pay much higher interest rates for your credit.

Shafted: If you fall below 560 you are in the shafted category. You may still get a credit card but you may be hit with a security deposit and/or high acquisition fees. Also, your interest rate will more likely fall between 15 and 23%. In this category, you can forget about most home loans and the majority of new car loans. If you do get credit you will pay much, much more in higher interest and unnecessary fees. Your insurance rates may be higher and some companies will not hire you.

How are these scores calculated? Your  score may be calculated by different methods depending on the credit bureau. Your score from a credit bureau does not come directly from B&E's company. Each bureau has their own adaptation and name. Equifax’s name is "Beacon", Trans Union’s is "Empirica", and Experian’s is "Experian/Fair Isaac." As opposed to B&E's scores these scores are also referred to as "Bureau Scores."

Since bureau data determines your score, every time your report changes your score will change. Many categories of information are taken into account in the calculation of your score. It is not based upon a single piece of information or factor. The importance of one or more factors may change in your score as the information in your credit report changes. Creditors look at many things when deciding on credit approval. These include the kind of credit you are applying for and your income. Your score only evaluates the information retained by the credit reporting agency and does not reflect these other items.

Which factors affect your credit score? There are 5 factors that are used in calculations to determine your overall credit score.

1.) History of credit performance (payment history) 35%. A creditor is interested in how you have paid in the past. Although it can be very important, your payment history is just one piece of information used in calculating your score.

2.) What is your current level of indebtedness (amount owed) 30%. Can the borrower pay this new credit and still afford to pay their existing bills? These are the types of questions that most creditors want to know and the answers are almost as important as your previous credit history.

3.) How old are existing credit lines (length of credit) 15%. In general a longer credit history makes for a better score. However, young people, students, or others with short histories can still score high overall as long as the other factors show good because this factor only makes up 15% of your total score. If you don’t have a credit history all you can do to improve this part of your score is to open an account, pay on it, and wait.

4.) Recent credit applications 10%. Shopping for credit and finding the best terms to meet your needs is important. However, every time a creditor runs a credit check on you, an inquiry is generated on your reports. FICO calculations take credit shopping into account. Specifically, a group of inquiries which probably represent a search for the best rate on a single loan are treated as a single inquiry (auto or mortgage loan inquiries only). Inquiries that were within 30 days of each other on an Auto loan count as one inquiry. You should avoid unnecessary inquiries as they may hurt your score. Although the system takes into account rate shopping, things like applying for credit card offers will add inquiries to your file and may reduce your score.

5.) Types of credit used 10%. B&E's system likes a good mix of different types of credit including both installment loans and revolving loans. Mortgages, auto loans, and personal loans are good examples of Installment loans which allow you to repay the loan over a specific period of time with fixed monthly payments. A revolving loan remains fully open as long as you have not reached the limit of the line of credit and allows you to repay the loan without a specific set of payments (credit cards, retail store accounts, and home equity lines of credit).

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