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Credit Score Definition


The Fair and Accurate Credit Transactions Act of 2003 (FACTA) defines a "credit score" as the following:

A numerical value or a categorization derived from a statistical tool or modeling system used by a person who makes or arranges a loan to predict the likelihood of certain credit behaviors, including default (and the numerical value or the categorization derived from such analysis may also be referred to as a 'risk predictor' or risk score.)

"A credit score is a numerical expression based on a statistical analysis of a person's credit files, to represent the creditworthiness of that person. A credit score is primarily based on credit report information, typically sourced from credit bureaus." - Source: wikipedia.org

A simple analogy is to say your credit report is like your financial grade point average (GPA). Like a GPA, there are items on a credit report that help the overall score, and items that hurt it. Examples of items that would negatively affect someone's credit score are:

  1. Bankruptcies and Judgments
  2. Foreclosures and Repossessions
  3. Tax and Civil Liens
  4. Late and Slow Payments
  5. Charge Offs and Inquires
  6. Plus more...

On the other side of the coin, methods for improving credit over the long run are as follows:

1. Pay bills on time.
   (Paying off a collection account does not remove it from the report)

2. Pay off debt, don't move it around.

3. Keep Balances Low on Existing Credit Cards.
   (Don't closed unused or open new credit card accounts.)

4. Build credit history and diversity.
   (Don't open a lot a new accounts too rapidly.)

5. Rate shop for a loan within a focused period of time.

6. Remove or correct items that are inaccurate or outdated.
   (Eliminating negative accounts has the largest impact and fastest        results when it comes to improving your score.)

 

Credit Score Categories

Prime
A consumer with a credit score that is above 679 is considered to be in the category that affords the lowest interest rates. Debt to income ratio plays a major role as well. An individual in this category can still be denied for a loan amount above a certain threshold. This depends on the amount of available funds to pay the monthly payment which is determined in part by the debt to income ratio.

Alt A
A consumer with a credit score that is between 620 and 679 falls in this category and will pay slightly higher rates than Prime.

Subprime
A consumer with a credit score that is between 500 and 619 falls in this category and will have an even higher interest rate.

Hard Money (Jilted)
A consumer with a credit score that is lower than 500 falls in this category and will find it difficult to obtain a loan at a reasonable interest rate. It is likely that additional fees will also be introduced to the lending equation.

How Much Does Bad Credit Cost?

When the consumer has very poor credit the lender has the ability to dictate stipulations such as interest rate, set-up fees, monthly fees etc. This becomes extremely detrimental on personal loans, lines of credit and credit cards. Listed below are two monetary examples of the long term difference between varying credit score categories.

Example 1 - $20,0000 auto loan over 5 years

Credit Score Auto Loan

Example 2 - $100,0000 mortgage over 30 years

Credit Score Mortgage Loan

 

How The Credit Score is Calculated.

The exact formula has not been released to the public and each of the three major credit bureaus use slightly different measurements. Given the ambiguity we still have general guidelines for calculating the overall score. These factors and weights are listed below.

Payment History (35%)
This portion is affected by timeliness of bill payment. This includes how late the payment was made and if it is still outstanding. Conditions such as how recent the late payment was and how often you are late also apply.

Amount Owed (30%)
Balances are the name of the game. The type of account such as credit card or mortgage will also apply here. Lenders do not want to see high credit card balances or many accounts with small balances.

History of Credit (15%)
The longer credit has been established the better the score. Using existing accounts frequently will also help the score.

Inquiries (10%)
There are no good inquires, every time someone inquires it hurts the score. Factors such as recent activity also play a part.

Account Diversity (10%)
A diverse mix of accounts will help the score, i.e. mortgage, auto, credit card. Opening many accounts in a short period of time may not.

Once you have decided that verifying and repairing your credit is the right choice, fill out our contact form or call 888-586-7099 and one of our credit specialists will be in contact with you shortly.