Interpreting Credit Scores

The number one variable lenders use to determine if they should grant you loan approval is your credit score. You have three versions of your credit report, one from each of three major credit reporting companies. The three major credit reporting agencies are TranUnion, Equifax, and Experian. Each of the bureaus have their own unique formula in determining how to score your credit. Every utilized method is used to detrmine the degree of credit risk that you are. The point system is the same for all the bureaus and can range between 300s-800s. It is very common that your credit score is going to vary between 50-125 points when comparing your profile from all three agencies. The differences are going to be a result of the different formulas used by the bureaus for credit scoring as well as the information they have about you.

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How credit scoring formulas are used:
Each of the reporting agencies use their own weighting system for determining credit scores. For example, a late payment can be looked at as more of a dramatic issue by one agency thus negatively influencing your credit score more drastically. Also, your credit score may vary depending on what type of loan or credit you are interested in. Meaning, your credit score is going to be different when applying for a car loan than if you were applying for a mortgage. Both of these scenarios are examples of how the different weighting systems used by the credit companies work.

About the varying information listed on each credit report:
A previously noted, each of three credit reporting bureaus have their own file on you, each with different information. This is usually a direct result of the different agencies obtaining your information from your creditors at different times. There really is never a time when all three of your credit files are going to align perfectly.

For example, if you get a 3-1 credit report, TransUnion may have your score at 660, while Experian reports you 700 and Equifax at 650. Lenders will typically utilize the median score. Learn how each of the major credit reporting agencies are reporting your credit by purchasing a 3-in-1 credit report.

If you notice a significant difference in credit scores amongst the reports, make sure there is no erroneous information on your report. Negative information can effect your score adversely. It is important to fix any problems immediately.

How credit scores are calculated:
Here is how it works...Each company utilizes a scoring method that focuses  on answers to a series of questions. Each question and answer is assigned points that are rooted on the degree of intensity positioned on each the particluar situations by the reporting agency. All of the information that is use when generating your score is deemed predictive of your future credit activity.

Just like almost every scoring system, credit scoring is not always 100% trustworthy. It is common for an individual that pays their loans and credit on time to have an inferior score than someone with late payments and accounts in default.

Factors that are used to determine your score:
Credit History - How long is your credit history?

Payment History - Do you exhibit a positive credit history of paying bills on time?

Types of Credit - What kind of credit do you have, i.e. auto loan, credit cards, utilities, etc..?

Credit Inquiries - How many times have lenders viewed your credit history as a result of applying for any type of credit or loan. The greater the amount of inquiries you have in a small period of of time, the worse. Therefore, do not apply for multiple loans and credit over a short period of time.

Debt - Are your credit cards maxed out? How much of your credit lines are you utilizing? Obviously the more debt you have, the greater the adverse effect on your credit score.

Factors that are by law not allowed to be used when determining your credit score are: religion, gender, race, where you live, what country you are from, and whether you are married or not.

Maintaining a positive credit history
Obtaining a copy of your credit report is the first thing you should do. You want to make sure that the information is accurate and up to date. You should always pay your bills on time and keep your balances as low as you can.

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