Credit Score 101
The credit scoring system was established during the 1980's as a way for lenders to quickly assess a prospective borrower's creditworthiness. This system was found to accurately calculate financial risk and over time started being used in several different industries. Today credit scoring is used by lenders, insurance companies, landlords, employers, utility companies, and even department stores.
Many different credit scoring formulas subsist today for a variety of evaluation purposes. The credit scores you may order online use an algorithm created for prospective borrowers that approximates these different formulas. Your online credit score may vary a bit from the score your lender uses. It will depend on the purpose of which they are calculating your creditworthiness; however it should be approximately in the same range.
The basic credit scoring formula is dependant on many factors from your credit report. The impact of each factor varies based on your credit report:
- Established credit how much credit your currently have with different lenders.
- Payment history indicates your monthly payment status since the time your account was established. This helps lenders determine rather you pay and if it is on time.
- Length of credit history is an established credit history. If you have long established history this makes you a less risky borrower.
- Recent inquiries when a lender or business pulls your credit, it causes a hard inquiry which causes a slight drop in your credit score.
- Amounts owed this is considered your debt to income ratio. Lenders establish if they think you can afford the additional payment based upon this.
- Types of credit - A balanced credit report has a good mix of credit accounts and loans.
When you are planning for a major purchase insure you check your credit scores and credit reports from all three credit reporting bureaus: Equifax, Experian, and Transunion. Checking your credit a month or so before your loan application will help you get a total picture of your credit worthiness.