Credit Score FAQ With Added Steps To Maximize Your Credit Score
Your credit score can mean the difference between you being able to afford your dream house, car, and even a job. Also, insurance providers, utilities, and other businesses sometimes use your credit score to decide how much to charge you or even accept you as a customer.
Therefore, even if you own your house, do not want any credit cards, and are not going to get a car loan you still will want to maximize your credit score.
This article will cover the following:
- How credit scores are calculated
- How creditors use your scores
- How a poor credit score can cause you to pay more for your insurance
Some of this is a review from my earlier Credit Score Tips article. However, even if it is a review, it is useful information to know.
How is Your Credit Score Calculated?
In theory, your credit score helps with predicting, how creditworthy you are, and how likely it is that you will repay your loan and make your payments on time.
Your credit score is calculated via information given to them by creditors. Some of which are listed below.
- Your bill-paying history
- The number of accounts that you have
- Whether you pay your bills on time
- How much debt you have
- How old your credit cards and other lines of credit are
- Collection lawsuits filed against you and judgments
- Bankruptcies-these will last on your credit report for ten years
- Repossession(s}-These will last for seven years on your credit report
- And other information.
To calculate your credit score, credit bureaus compare the above information with the loan repayment history of consumers with similar creditor profiles.
Each of the above factors may result in either raising or lowering your credit score.
Is The Credit Score A Reliable Predictor For Your Credit Worthiness?
Credit Scoring systems enable creditors or insurance companies to evaluate millions of applicants consistently on many different characteristics. To be statistically valid, these systems must be based on a big enough sample.
In theory, credit scoring systems generally enable faster, more accurate, and more impartial decisions than a single individual would make.
However, creditors that solely rely on your credit score as a basis for granting you credit, may miss out on certain reasons why you could actually be a good credit risk.
No matter what, whether or not credit scores are a good predictor or not is not relevant if you desire credit. To put it bluntly, if you want to get the best interest rate you will have to maximize your credit scores
Credit Score Alternatives
To develop a credit scoring system or model, a creditor or insurance company selects a random sample of customers and analyzes it statistically to identify characteristics that relate to risk.
Each of the characteristics then is assigned a weight based on how strong a predictor it is of who would be a reasonable risk. Each company may use its own scoring model, different scoring models for different types of credit or insurance, or a generic model developed by a scoring company.
Under the Equal Credit Opportunity Act (ECOA), a creditor’s scoring system may not use race, sex, marital status, national origin, or religion as factors. However, age is allowed, but any credit scoring system that includes age must give equal treatment to applicants who are senior citizens.
Insurance Rates And Your Credit Score
Some insurance companies also use your credit report information, along with other factors, to help predict your likelihood of filing an insurance claim. As a result, the lower your credit score is, the higher your premium may be. Also, individual insurers, if you have poor credit, may not even offer you a policy.
What Can You Do To Improve Your Credit Score?
Credit scoring systems are complex and vary among creditors or insurance companies and for different types of credit or insurance. If one factor changes, your score may change. However, improvement generally depends on how that factor relates to others the system considers. Only the business using the system knows what might improve your score under the particular model they use to evaluate your application. Under most situations, Improving your score, significantly, is likely to take some time. However, with persistence and time, you can improve your score.
Scoring models usually consider the following types of information in your credit report to help compute your credit score. So, ask yourself the following questions if you want to improve your credit score:
- Have You Paid Your Bills On Time? Your payment history is a significant factor in determining your credit score. Bills paid late, account(s) referred to collections, bankruptcy filings will all negatively affect your credit score.
- Is Your Credit LImit Maxed Out? Many scoring systems evaluate the amount of debt you have compared to your credit limits. If the amount you owe is close to your credit limit, it’s likely to hurt your score.
- How Long Have You Had Credit? Generally, scoring systems consider your credit track record. Insufficient credit history may affect your score negatively, but factors like timely payments and low balances can offset that.
- Have You Applied For New Credit Lately? Many scoring systems consider whether you have applied for credit recently by looking at “inquiries” on your credit report. If you have applied for too many new accounts recently, it could harm your score.
- Do You Have Mistakes On Your Credit Report? Errors can and do often happen on your credit report. So, check your credit report regularly and get the errors removed or modified ASAP.
Not all credit inquiries are counted against you. For example, inquiries by creditors who are monitoring your account or looking at credit reports to make “prescreened” credit offers are not considered liabilities.
- How Many Credit Accounts Do You Have, and What Kinds Of accounts are they? Although it is generally considered a plus to have established credit accounts, too many credit card accounts may harm your score. Also, many scoring systems consider the type of credit accounts you have. For example, under some scoring models, loans from finance companies may hurt your credit score.
- Not Just Your Credit Report-Scoring models, used by creditors, may be based on more than the information in your credit report. When you are applying for a mortgage loan, for example, the system may consider the amount of your down payment, your total debt, and your income, among other things. However, a credit score is a good starting point to find out if you need to work on raising your credit report.
Medical Bills May Be Treated Differently-Emergency room visits and other types of medical bills are considered differently by some creditors. As a result, it will not look as bad, by some creditors, if the majority of your past-due-accounts are because of medical bills.
What If I Am Denied Credit Or Insurance, Or Don’t Get The Terms I Want?
If you are denied credit, the ECOA requires that the creditor give you a notice with the specific reasons your application was rejected. Also, you may be given news that you have the right to learn the reasons for your credit denial provided you ask within 60 days.
Ask the creditor to be specific: Indefinite and vague reasons for the denial are illegal. Acceptable reasons might be “your income was low” or “you haven’t been employed long enough.” Unacceptable reasons include “you didn’t meet our minimum standards” or “you didn’t receive enough points on our credit scoring system.”
Sometimes you can be denied credit or insurance— or offered less favorable terms — because of information in your credit report. In that case, the FCRA requires the creditor or insurance company to give you notice, which includes, among other things the name, address, and phone number of the credit reporting company that supplied the information. Additionally, If a credit score was a factor in the decision to deny you credit or to offer you terms less favorable terms the notice also will include your credit score. Also, if you receive one of these notices, you are entitled to a free copy of your credit report.
Contact the company to find out what your report said. The credit reporting company can tell you what’s in your credit report, but only the creditor or insurance company can tell you why your application was denied.
If a creditor or insurance company says you were denied credit or insurance because you are too near your credit limits on your credit cards, you may want to reapply after paying down your balances. Because credit scores are based on credit report information, a score often changes when the information in the credit report changes.
If you’ve been denied credit or insurance or didn’t get the rate or terms you want, ask the following questions:
- Ask the creditor or insurance company if your credit score was used. If it was, ask what characteristics or factors that were used in their system, and how you can improve your application.
- If you receive a notice explaining that you are being offered less favorable credit terms than those offered to most other consumers, ask the creditor or insurance company why you aren’t getting its best offer.
- If you are denied credit or not offered the best rate available because of inaccuracies in your credit report, be sure to dispute the inaccurate information with the credit reporting company.
As stated, in order to get the best or even adequate interest rate for your loan and lower insurance premiums, you will need to raise your credit score. Therefore, one of the first steps to financial independence is to increase your credit scores. Improving your credit score will take time and persistence. But, maximizing your credit score can be the difference between you buying your dream house.