Credit Scores: How are they Calculated?
Andover, Massachusetts August 13th, 2010 – Just like everything in life, practice makes perfect when it comes to personal finance. Young people just starting out their independent lives and even older Americans that never learned the good from the bad tend to make huge mistakes when it comes to their own finances that can cost them thousands over the span of their lives. How do you know your making a mistake with your finances? Well a good place to start is to understand how banks and other creditors judge your credit worthiness and the factors that go into this judgment.
While the term credit score has entered the popular vocabulary over the last few years the majority of Americans still have no idea just how the score is calculated and how big of an impact this simple 3 digit number can have on their lives and pocketbooks. Your credit score is based upon the information that is included in your credit report which has among other things your payment histories, personal information, and any public records that are connected to your finances. Whenever you open a new line of credit the creditor reports this to one of the three main credit report agencies in the US, TransUnion, Equifax, and Experian. These are private firms that collect and verify the credit information for anyone living in this country.
Your score is then calculated using an equation that takes into account 5 factors, each with a varying degree of impact….
- The largest factor is an individual’s payment history. If you are always on time with your bills then this should be an easy factor to control. Unfortunately, it is quite common for people to forget to pay their bills by accident which then hurts them for the foreseeable future with a lower credit score. This might not be relevant if your score is 800, but if you drop from 620 to 595 because you were late on a bill then it could prevent you from even getting a line of credit.
- The 2nd factor is the amount of debt you owe in relation to your available credit. Credit Bureaus look for a ratio below 30%, so if you carry a balance of $8,000 per month on a card with a $10,000 limit your score will drop even if you pay the bill each month in full and on time.
- The 3rd factor that determines your credit score is your credit history. The longer your history with credit is, the better your score will be because the bureaus will have an idea of how you handle your finances.
- The 4th and 5th factor are similar and both account for around 10% of your score. They deal with the types and amount of new and existing lines of credit you have. If you have 10 credit cards or recently opened 4 lines of credit then your score will fall. Banks like to see a variety of different lines with no excessive amounts. So a consumer with a car loan, home mortgage, and 4 credit cards would receive a better score than a consumer with 3 car loans, 2 home mortgages, and 7 credit cards.
Remember, if you don’t know how your score is calculated, how can you ever get around to improving it? Next time you enter a Department Store and are offered a store card think about what it will do to your score and you just might end up walking out of there with one less card in your wallet! And please don’t fall for the catchy jingles that credit report services use to get you to enroll in a credit protection plan. The only authorized and completely FREE source for your credit report (not score) is www. Annualcreditreport.com . This is an official government website that was created by the 3 reporting agencies and the US government to ensure that consumers have access to their own reports.
Readers, did you know what factors made up your score? Were you like me and always opened up a new card in stores that offered 10% off the purchase?
Preferred Financial Services is a debt reduction firm certified by the CFC (Center for Financial Certifications) and accredited by U.S.O.B.A. (United States Organizations for Bankruptcy Alternatives). Headquartered in Andover, Massachusetts, Preferred Financial Services has been a leader in the debt reduction industry since 2003. Preferred Financial Services has acquired some of the best experience in the industry over the past 7 years. In 2009 alone Preferred Financial Services reduced over $16.5 million worth of consumer debt for just $6.4 million, for a savings of about 60%- and over 2,900 accounts were settled on behalf of their clients.
For more information, please visit www.pfsdebtrelief.com or follow us on our blog at www.pfsdebtrelief.com/blog/ .
Contact:
Stephan Tavernini
Marketing Coordinator
Certified IAPDA Debt Arbitrator
Preferred Financial Services
