How Credit Scoring Works

The all important credit score! It determines amount of loan you can get, it determines interest rate at which you are charged for a loan, etc. Your credit score plays an important figure in your financial life. So what goes into making that all important score of yours? How does it increase, how does it decrease and what are factors that go into its calculation?

Your credit score is a number that reflects on likelihood at which you will pay back a loan. Scores range from 350 (high risk) to 950 (low risk). Credit scores do not take into consideration your income, how much savings you have or demographic factors such as gender, race or nationality. Your credit score is affected by your current debt level, your past delinquencies, your credit history and how many times your credit report is pulled up by various agencies. Your score considers both positive and negative information in your credit report. For instance, recorded late payments will lower your credit score while a good track record of making payments on time will raise your credit score. Timely payment of your bills is important to ensure you maintain a good credit score. The amount of balance you have left on your credit card, how many credit card accounts you hold and your use of revolving credit also affect your credit score to a great extent.

Understanding Credit Report Score

Understanding credit report scores is important when you see your credit report because you need to be able to make some sense of it. Your credit score is used by anyone loaning you money such as credit card companies, home loan lenders, auto loan lenders and finance companies. They all use your credit score to determine your credit risk. The interest lender charges you is based on your credit risk. So you can see how understanding credit report scores is information that can save or cost you money. You need to find out what your credit score is before you talk to any lender in case there is something on your report that you may question. You don't want lender to find a mistake that you aren't aware of. If you find a mistake, it takes at least 30-60 days before you see corrections in your credit reports and scores. You have probably heard that checking your credit will bring down your score. But checking your own credit report and score is counted as a "soft inquiry" and doesn't harm your credit score at all. Only "hard inquiries" from a lender or creditor, made when you apply for credit, will bring your credit score down a few points. Your credit report should have three main credit services Experian, Trans Union and Equifax and each service will give you a different credit score. The credit scores will range between 300 and 870 with each credit service giving a different score. The higher your score is better, because as your credit score increases, your credit risk decreases. The average high approval score where best interest rates are offered is 680 or above. The credit score lender uses comes from middle score or an average of all three scores is sometimes used.