UNDERSTANDING THE CREDIT SCORING SYSTEM

 

Before you can start rebuilding your credit you must know how the credit scoring system works.

The credit scoring system ranges from 300 to 850 scores and of course the 300 score is bad and the 850 score is perfect.  The score is determined by the way you use your credit now this is where it gets a little complicated but I will try my best to explain this.

There are 3 main credit bureau’s that financial institutions use:

Experian

TransUnion

Equifax

These bureaus gather the consumer’s spending habits and form a scoring system that is called a credit score.  The financial institutions take this information and determine if a consumer is a high risk, middle risk, or low risk.   There is no such thing called a “no risk” individual due to the fact that life happens and even wealthy people sometimes have problems paying their bills on time.

The risk assessment determines a consumer credit score and usually, credit scores fall into three categories either you have good credit, fair credit, and bad credit.

Credit Categories

Poor Credit Score:  300- 579

Fair Credit Score: 579-675

Good Credit Score: 675-850

Now you are probably asking yourself what kind of habits that consumers do that the credit bureaus look at to determine a credit score? Well, there are many things but I will list the top five activities that I have found the bureaus look and they are:

Top 5 Factors To Determine Your Credit Score

• Payment History
• Credit Account Balances
• Different types of Credit Being Used
• Age and Length of Your Credit History
• Hard Credit Inquiries

Top 5 Factors Explained

Payment History:  Longer the payment history the more it affects your score.  In my opinion, this is the most important factor of them all which is why I listed this first.  Banks are taking a risk of lending you money and they want to know how you pay your bills.  It is vital to pay all of your bills on time every month even the phone bill.  Do not skip paying your bills this is what I did and it cost me a lot of money and time to make this up. The creditors usually report missing payments after 30 days late.  Good solid payment history is the biggest step in keeping or obtaining a good credit score.  Only time can make your payment history longer the older you get the longer the history.  It is important to start this good habit when you are young.

Credit Account Balances:  Now payment history and the account balances work hand in hand.  You make an on-time payment your balances should go down a little at a time your interest rate will determine the amount.  This is why I try to pay more than the minimum payment to show the banks I can handle the depth.  When you skip your payments or pay late the balances will go up due to late fees and other penalties being added to the balance.  The banks will look at the original balance and the current balance to see how the account is doing and to determine if they trust you with more depth or not.

Different Types Of Credit:  Financial institutions like to see different types of credit on your credit report.  Different types of credit here are a few types:

• Auto Loans
• Installment Loans
• Revolving Credit
• Home Loans

Banks do not like to see just one type of credit on a report.  They like to see if you can handle more than just a credit card (revolving credit) or a simple bank loan (Installment Loan) they want to know can you handle auto loans and a mortgage (Home Loan) and a credit card the more you can handle responsibly the more they are likely to trust you. The higher the credit score you will get.  Now don’t bite off more than you can chew stay within your means and do the best you can on what you got.  This is where I feel that this is how our credit system creates the poor, middle, and rich classes of our society.

Age And Length of Your Credit History:  Now this is where if you are young, not much you can do about this factor.  Only time can age a credit history and over this time you consistently get new loans and credit cards and buy automobiles and you pay them on time consistently this will make your credit score go up more and more over time.  Now, this is the reason banks ask young people for a co-signer like their parents mainly on a house and car loans.

Hard Credit Inquiries:   To me, this is the least important of the 5 credit factors but still don’t overdo it.  A Hard Credit Inquiry is when you apply for a loan and the financial institution pulls your credit report to see what kind of risk you are.  As soon as that credit report is pulled it triggers a Hard Credit Inquiry.  It does not matter if you are approved or disapproved or you even if you don’t take the loan this hard inquiry can stay on your credit report anywhere from a couple of months to a couple of years and too many of these will lower your credit score.  So do not apply until you know for sure you want or need another loan.

 

Here a Couple of Questions People Like To Ask

Which factor influences your credit score the most?

Answer:  Payment History is the biggest factor.  This is what you do the most and this is the only way the financial institutions know how responsible you are.

 

How often a credit score update?  

Answer:  Credit scores usually update when a financial institution reports financial activities to the credit bureau’s but on most accounts I find they report updates every 30 days.  This is why you see a missed payment on your credit report it usually says past 30 days or past 60 days and so on.

What does your credit score start at?

Answer:  It starts as soon as you make your first loan or open your first credit card.  There is no such thing as a starter score you have no credit score until you start using credit.  My father-in-law was 70 years old and did not have a credit score because all of his life he paid cash for everything.  When he tried to buy a car we had to cosign for the loan.

 

My finale Thoughts About The Credit Scoring System

I understand why we have a credit system in our society today it is about the only way the banks can tell what kind of risk you are.  I feel it can be improved and I feel there should be a mandatory class that every senior in high school should have to take and pass before he or she can graduate.  I learn about the credit system the hard way.  I had no idea if you put off paying your bills even for a month can hurt your credit.

I also feel that society uses the credit system to discriminate against certain groups of people as well.  For maintaining a good credit score you have to have two things and sometimes in a person’s life bad things happen to good people.  Two things you must have are a steady stream of income and good luck.  Without either one, it is impossible to keep up your credit score.  I know that by first-hand experience.  I hope this post helps people to learn more about the United States Credit System.

Written by

Roger P. Kunze

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Welcome to WordPress. This is your first post. Edit or delete it, then start writing!