Understanding the Credit Scoring System


by Jacob Joseph - Date: 2006-12-21 - Word Count: 392 Share This!

Understanding what a credit score is, how it's computed, and its purpose can be confusing and difficult to understand. Detailed below is information that will help you understand all of the basic concepts behind your credit score.

What does credit scoring mean?

Your credit score gives lenders and creditors the opportunity for a quick, unbiased analysis of your credit history. Basic credit scoring models were developed in the early 1980s by the three major credit reporting bureaus, Experian, Tranunion and Equifax. These three groups worked with the Fair Isaac company to develop the credit scoring system for people based on their individual personal information.

How is my credit score computed?

Credit scores are calculated primarily from two major pieces of data. One is a computer generated score that is based on a variety of information listed in your credit report:

How many accounts do you currently have open?

How much debt do you have?

What is your payment history like?

--Do you pay your bills on time?

--Are any of your accounts delinquent or in collections?

How long have you had credit?

--How many accounts do you currently have?

--Length of time these accounts have been open.

--How frequently are these accounts being utilized?

How much new credit do you encompass?

-- How long ago did you open your last credit card account?

-- What is the total number of credit inquires that you have had in past year?

-- Is the new credit you have positive?

The other source of information used to determine your credit score is the evaluation of your history and behavior to individuals with similar credit profiles as yours. Points are rewarded for every factor that helps conclude who is going to be the more responsible individual when it comes to paying debts. This is how your credit score is produced.

What is the intent of the credit scoring system?

Credit scores allow for 'instant credit' to be issued by banks, lenders and creditors. For example, if you are in the market for purchasing a new home, you can fill out an application for a mortgage at your local bank and find out instantly if your credit score is strong enough for loan approval. In the past, it was impossible for banks and financial institutes to offer these types of instant decisions.

The credit scoring system is objective and is designed based on large scales of statistical information, ultimately eliminating the possibility of prejudgments by creditors and lenders.


Related Tags: credit scores, credit reports

Jacob Joseph is a financial expert for http://www.starloanservices.com. At Star Loan Services you can get a free copy of your credit report.

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