Monday, February 29, 2016

How Credit Score Points Affect Your Credit


Your credit score it is one of the most critical factors in your financial life. Your credit score determines if you are approved for a loan or line of credit. Credit scores are used to determine: if you will be hired for a job, interest rates, terms and conditions, downpayment costs, rates for medical and other insurance coverage, approval for cable and internet service and more.

A credit score is a mathematically calculated number developed by the Fair Isaac Corporation (FICO) that lenders use to rate potential customers in determining the likelihood that a customer will pay their bills on time.

A credit score or credit rating is determined by using five main criteria as defined by your payment history which accounts for 35% of your credit score, the amounts owed which accounts for 30% of your credit score, the length of your credit history which accounts for 15% of your credit score, new credit which accounts for 10% of your credit score, and the types of credit used which accounts for 10% of your credit score.

Payment history shows the history of how you paid your bills either on time or late. Amounts owed shows the total amount of credit you have available. The length of history indicates how long you have had credit. New credit indicates how many times you have applied for new credit. If you open too many new accounts in a short period of time this may lower your credit score. The types of credit used indicate the types of accounts you have such as revolving or installment accounts. Revolving accounts are usually credit cards and installment accounts are usually mortgages, auto loans, etc.

The FICO credit score model ranges from 300-850 with 850 being an excellent score and 300 being the worst score. The higher the credit score the lower the interest rate you will receive for a loan or line of credit. Possessing a good credit score can save you thousands of dollars in interest over the life of the loan or on a line of credit. A good credit score is generally in the range of 720 or above but may vary from lender to lender.

When applying for credit or a loan if all three credit scores are pulled, the middle score is generally the score used with the application.  Your credit score varies from each bureau because each agency collects their own data from various sources and may collect different data for the same account. Your score can vary anywhere from 5-40 points between the three credit bureaus.

Your credit score changes due to updates to your credit file which changes based on account activity such as balance changes or additions to your credit file (i.e. new accounts or deletion of older negative accounts more than 7 or 10 years old). As a result, you may see a difference in your score from one month to the next.  Here are some guidelines to help you determine how payments affect your credit score:


  • Paying a 30 day late payment can increase a score by 3-80
  • Paying collection accounts can increase a score by 20-90 points
  • Paying public records (judgments, tax liens, Chapter 7 or Chapter 13 bankruptcy) can increase a credit score by 75-150 points
  • Paying a charge-off can increase a credit score by 50-100 points
  • Paying a repossession can increase a credit score by 50-100 points
  • Paying delinquent student loans which can increase a credit score by 50-80 points

The major disadvantage of credit scoring is that it relies on information in your credit report that may contain errors. It is estimated that 75% of credit reports contain at least one error.  That is why it is so important that you check your credit report at least once a year to ensure that all information is accurate and up to date.  

If you plan on purchasing a large item such as a car, house or investment property, it is best to pull your credit yourself to see if any negative items appear so you can fix those issues before applying for a loan. The best way to understand your credit score is to do research and read the information that is included when you order your credit report.

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