Credit Scores

Are the Scores Fair?

While you may grumble, your credit score remains an indicator upon which to award or deny credit. What the score does is replace, in part, the older method of credit approval based on banking intuition “gut checks” criteria upon which they based their own predictions of your behavior.

Upsides Of Credit Scores

The advantage of credit scores is that it eliminates all references to age, race, sex, income, type of job, length of employment, martial status, time at current address and whether you rent or own.

Downside Of Credit Scores

The downside is that scores change quickly, within 30 days of a credit event, like a late payment, and remain unchanged until a series of positive events such as several on-time payments, neutralizes the negative. In essence it’s your financial snapshot. And that’s a good thing, because snapshots only capture an image of you at a particular moment. Scores can be changed with time and effort. But bad scores remain unless your behavior changes.

They’re Everywhere

Credit scores are pervasive. Your score affects everything you do, including apartment renting, house purchases, buying car or cell phone service plans or applying for jobs. Credit card issuers will peek at your score to see if they can increase your credit limit, or justify increasing your rates, not that they need much for that.

A Short History

Credit scores weren’t widely known until a few years ago, when the lending industry’s closely guarded secret got out. Lenders justified keeping the secret by claiming that everyday consumers would have difficulty understanding it. That was the stated reason. The real reason is they feared that once “dumb” consumers got wind of the score idea, they would change their behavior and manipulate the system.

The resulting uproar lead to changes in the law over the last several years and an increased awareness of credit for some. For the majority of folks, they continued to spend like wild banshees, racking up unprecedented amounts of credit card debt until the government stepped in and said “Whoa!” Legislation passed making it harder to declare bankruptcy, the favored bail-out choice, and increasing minimum payment requirements credit card issuers would be encouraged to charge.

How It Affects You

How you pay your bills - 35 percent

Payment history is important, but recent activity carries more weight. Paying on time is good. Paying late isn’t. Collections are worse. Declaring bankruptcy is fatal.

Outstanding debt and available credit - 30 percent

How much money you owe on credit cards and loans is important as is the total amount of available credit. The system predicts people with a lot of available credit will use it, which puts them into a risk category. Having several unused cards isn’t as bad as having fewer cards that are near to or are maxed out.

Credit history - 15 percent

The longer you've had credit the more points you get, especially if it’s with the came creditor

Credit mix - 10 percent

Those individuals with a mix of revolving credit, credit cards, and installment debt are considered better credit risks because it’s assumed they know how to handle money.

New credit applications - 10 percent

Shopping is OK when your credit is good, bad when you’ve hit some bumps in the road, like late payments or collections. If you do, shopping seems like a desperation move to replace the stuff that’s about to go bad.

Keep Your Credit Report Accurate

Since your FICO credit score is a financial snapshot based on data supplied by your credit reports, there a 79% chance it’s based on inaccurate data or errors. Check your credit reports periodically, at least twice a year, and six months before planning to apply for a loan. This lead time will give you some breathing room to correct the errors and increase your score.

Want To See Your Score?

Check out a free Score estimator at FICO.