A credit score, also called a credit profile, is a numerical measurement based upon a mathematical model of an individual’s credit profile, to reflect the creditworthiness of such an individual. Such a credit score basically is based upon a credit file, such data usually sourced from three credit-reporting agencies. The credit score then is used by credit issuers and lending institutions to determine individuals’ credit-worthiness. If a credit score reflects well on one’s financial status, then that individual is considered a high credit risk. High credit risk individuals will be regarded as high credit risk borrowers and given credit authorization or loan.
Experian and Equifax are among the three major credit reporting agencies that produce credit scores. Experian is one of the three major consumer reporting companies in the United States, along with TransUnion and Equifax. Each of the credit reporting companies have their own credit scoring models that they use for Experian, Equifax, and TransUnion credit scores, while all the other credit reports are evaluated through a standard mathematical formula.
Credit profiles are frequently subjected to erroneous, inaccurate, or outdated information. This could be either voluntary or involuntary. Voluntary errors are those caused by people, for instance when they fail to report something, and as such do not make it onto their credit reports, or as they miss payments, which causes it to be reported inaccurately. Some people may deliberately attempt to tamper with their credit scores by deliberately reporting inaccurate information. This can have the effect of rendering a credit score inaccurate. The credit bureaus do try to correct inaccuracies in credit reports, but this process is time consuming and costly for them.
Accurate credit scores can be manually calculated using information from the three credit-reporting agencies. This process is known as Fair Credit Reporting Act (FCRA) processing. Information that is removed from a credit score by errors and omissions is referred to as “found inaccuracies.” These inaccuracies must be corrected before the credit score can be calculated using accurate information. Credit scores are also calculated using voluntary errors, which are not corrected during FCRA processing.
Higher credit scores result in lower interest rates and terms, because you are considered a better risk to the lender. Lower interest rates and terms translate into more favorable terms in purchasing a home or car, which will save you thousands of dollars in the long run. A higher credit score also means a greater amount of disposable income, which you can put to better use than paying high interest rates and buying expensive things you may not need. A higher credit score also indicates that you are more responsible and can potentially pay your bills on time.
Credit scores are affected by several factors, including the total debt you have, your payment history, the amount of credit available to you, your history on accounts, the types of accounts, and your current income and debt level. All of these factors are considered when calculating your credit scores. The biggest factor that is most commonly changed is the total debt you have. People who have more revolving credit accounts, such as credit cards, tend to have higher credit scores because they are more responsible with their money.
Your credit score can also be affected by the type of account that you have. Some lenders prefer accounts that are paid off at the end of each month because they do not favor accounts that are not available credit. In order to make sure that your scoring model covers all possible scenarios, you should also keep an eye on your open and closed accounts. You want to keep your credit card balances low because they negatively affect your credit score. Closing accounts also negatively affect your scoring model, but it is better to keep your accounts open than to close them when you have achieved the total debt to total recommended by your scoring model.
Paying your bills on time and making your payments to creditors on time will also boost your credit scores. Even late payments can be reported to creditors and cause your credit scores to drop. So, if you are having trouble getting approved for a mortgage or other type of loan, consider paying your bills on time and paying off those open accounts. Also, keep your credit card balances low and use them only occasionally so that you do not continue to damage your scores with late payments. Once you have achieved the total debt recommended by your scoring model, you will start to get approved for loans and other types of credit.
