Your credit score is a three-digit number generated by a mathematical algorithm utilizing the information contained within a consumer’s credit file. This numerical number can predict potential risk associated with lending money to consumers. It helps a lender determine its risk to help mitigate losses due to acquiring a bad debt or debtor (consumer). Credit scores can also provide a reflection of a consumer’s repayment on credit obligations. Ideally, the scoring system allows creditors to evaluate applicants consistently and impartially to determine their credit worthiness.
Yet, there is one scoring model that is relied on and in demand more so than all the others and that is called the FICO scoring model. Developed in the 1950s, the FICO scores have evolved and become an industry standard. It is suggested that over 90% of financial institutions uses the FICO scoring model when it comes to their decision to grant credit. FICO scores range anywhere from 300 to 850, where a higher number indicates lower risk and a low number indicates a high risk.
There are also various versions of the FICO scoring model that can provide industry specific scores:
Example: If you’re purchasing a car, a FICO auto score may be helpful since it’s used in the majority of auto financing related credit decisions. The same may hold true if you’re applying for a credit card. A FICO bankcard score may be used since it’s specific to that industry and used by many credit card issuers.
Even with the multiplicity of FICO Score versions being used throughout the credit world, they still share the same premise – having the ability to detect high risk versus low risk applicants. Similarly, good credit behaviors like paying your bills on time and keeping a low debt to credit utilization are also reflected in credit scores. All of these factors work in tandem to allow your FICO scores to be accepted across the board.
There are five factors that determine your three digit credit score. Some weighing heavier than others: (graphic). However, a scoring system may not use certain characteristics like race, sex, marital status, national origin or religion as factors. Although age may be a factor with some creditors, any scoring system that includes age must give equal treatment to elderly applicants.
Generally a credit score of 700 or higher would be considered very good and with major buying power. An 800 credit score is considered exceptional and can pretty much allow you to obtain whatever you desire. A score in the mid 600’s may result in a demand for more money as down payment and higher interest rate when making a major purchase like a home or car. However, that same 600 score may be adequate enough when applying for credit in department stores.
Your credit score changes regularly as you make payments as do the information contained in your credit reports. Keep in mind that as negative information ages; it has less of an impact on your credit score. That’s why it’s imperative to be diligent in monitoring your credit reports. Your credit scores may not always comply with lender’s standards. However, lenders may take into consideration special reasons for your past credit problems. Furthermore, lenders not only review your credit scores but may also observe other factors such as – job history; current income; and other savings to determine a final decision. Become Credit Worthy Today. For more information on how to maintain a positive credit score, order your copy of “Becoming Credit Worthy. On Sale today!
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