Credit Score Meaning: What Does My Credit Score Mean?

This scoring system is intended to formulate a snapshot of the risk you presently represent to a lender. Many parameters in your credit file, including number of open accounts, length of credit history, mortgages, loans, and others are formulated to bring out a three-digit score between 300 and 950. There are different scores applied by lenders and insurance firms (some of which are formulated by FICO^®). These other scores use other data into account. Typically a lender will apply a combination of your credit score with other factors when deciding your risk. They all have the same objective, to find out the borrower’s potential risk. Regardless of whether the score was generated by FICO^® or a system based on FICO^® parametric quantity, they all yield an industry standard three-digit score. This score puts the borrower in one of three main categories (we named the third one ourselves.)

Prime, sub-prime, and shafted

Prime
If your three-digit score is above 680, you are counted as a “prime borrower” and will have no trouble getting a favorable interest rate on your auto loan, home equity loan, or credit card.

Sub-Prime
If your score is under 680, you’re “sub prime”, and will probably pay a bigger interest rate on your loan.

Shafted
Below 560 is the shafted score. At least that’s how nearly all lenders and credit issuers look at it. You can still get a credit card but you’ll probably be hit with a security deposit or high acquisition fee. In addition to that your interest rate will likely be 22 to 23%. You can forget about most home loans and the majority of new auto loans at this score. Below 560 is not the place you want to be. You’ll pay a lot more in higher interest and excess fees. You might even pay a lot for your insurance rates. A shafted score can even keep you from working with many companies. If you’re in this catagory Click Here or read the article How Bad Credit Affects You.

How are credit scores calculated?

The methods of calculating your credit score may differ slightly depending on the credit bureau. When obtaining your score from one of the Credit Bureaus it is important to understand that your score does not come directly from FICO^®. It is adapted to each bureau and is given its own name: Equifax uses “Beacon”, Trans Union uses “Empirica”, and Experian uses “Experian/Fair Isaac.” These scores are also referred to as your “Bureau Scores.”

Since your score is derived from your bureau data, it will change every time your reports change. However your score is calculated, it will always take into consideration many categories of information. No one piece of information or factor determines your score. As the information in your credit report changes, the importance of one or several factors may change in your score. Lenders look at many things when making a credit decision, including your income and the kind of credit you are applying for. However, your credit score does not reflect these facts as it only evaluates the information retained by the credit reporting agency. To Learn More Click here.

What factors affect your credit score?

There are five factors which are used in credit scoring calculations that determine your overall credit score.

The different factors affecting your credit score calculation.

Previous Credit Performance (Payment History) 35% A lender wants to know what your payment history is like. Have you paid everything on time, are you late on anything now, and so on. Your payment history is just one piece of information used in calculating your score, although it can be the very important.

Current Level of Indebtedness (Amount Owed) 30% How much is too much? Can the borrower pay me and still afford to pay his other bills? Not necessarily. Having available credit can actually help your ratio of debt to available credit. These are the types of questions that most borrowers want to know and the answers are almost as important as your previous credit history.

Amount of Time Credit Has Been In Use (Length of Credit) 15% Generally speaking, the longer the credit history the better your score. However, this factor only makes up 15% of your total score so even young people, students or others with short histories can still score high overall as long as the other factors show good. If you are new to credit than there is little you can do to improve this part of your score. Open an account and be patient.

Pursuit of New Credit (10%) Credit is much more popular today. Just look at the number of credit card offers you get via the Internet and in the mail. Consumers can now shop for credit and find the best terms to meet their needs. Each time someone runs a credit check on you, it creates an inquiry.

Fair Isaac has changed some of its calculations to account for these new trends. Specifically, they treat a group of inquiries – which probably represents a search for the best rate on a single loan – as though it was a single inquiry (note: this only applies to auto or mortgage loan inquiries.) For example, auto loan inquires that are within 14 days of each other only count as one inquiry.

Types of Credit Experience (10%) A healthy mix of different types of credit, installment loans, retail accounts, credit cards, and mortgage. This score is not normally a key factor in determining your score but it can help a close score. Its not a good idea to try and open different types of accounts just to try and make this factor better. It will likely reduce your score in other areas. You should never open accounts you don’t intend to use anyway.

What type of accounts you have, and how many, can make a big difference. The optimal ratio of installment versus revolving accounts depends on your profile and differs from person to person. One factor that seems to have significant influence is your percent of open installment loans. Too many can lower this portion of your score. For more information Click here.

Improving your credit score

Now that you know how your score is calculated, you can begin making changes to your current financial planning. The best things you can do are simple.

• Pay your bills on time. Sounds simple, but this is the biggest thing you can do to keep your score high. Delinquent payments and collections have a major negative impact on a score.
• Keep your balances low on unsecured revolving debt like credit cards. High outstanding balances can affect a score.
• The amount of your unused credit is an important factor in calculating your score. You should only apply for credit that you need.
• Make sure the information in your credit report is correct. If its not, dispute it with the credit agencies and/or with the creditor directly.
• Removing negative items on your credit reports has the biggest impact on your credit score. Generally, negative items stay on your reports for seven years but you can hire a professional credit report repair service such as Lexington Law Firm to do it for you.
• You can try to understand the laws yourself, but we have found it’s so much easier to have someone do it for you. We strongly recommend using Lexington Law Firm, they are the industry leaders.

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