Credit Scores
Confused about Credit Scores based on your Credit Report? Read This!
If you are confused about credit scores, then join the club! Even lending professionals have difficulty understanding all the nuances of credit scores. For consumers, the task is even more difficult. However, here are some generalities that may help you:
- Credit scores are based on your credit report. A good credit score, also known as a credit risk score, generally requires good credit on your credit report. If possible, that means no lates, no collections, no bankruptcies, and no public records. Of course if you already have these “derogatory” items, try to minimize them. Keep in mind it also helps your credit score as the items of bad credit “age” or get older. That means older bad credit may not lower your score as much as recent bad credit. However it is not always that simple. Bottomline, you will need good credit to get a good credit score.
- Since your credit report credit score measures the “risk” you will default on an obligation, a good credit score requires other factors on your credit report that imply you are a good risk. That means even someone with a perfect payment record may still be scored as “risky”. For example “risky” credit reports may have too much credit, or high credit balances, or lots of inquiries. Unfortunately these factors are scored relative to your entire credit report, so too much credit for one person may be okay for another.
- Credit scores not only affect your eligibility for credit but also the interest rate for your credit. So even if you may qualify for a loan with a lower credit score, it may be at a higher interest rate because of your lower score. Higher credit scores qualify for the best programs with the best terms and the lowest interest rates.
- Credit scores are not only used for loans but also for rentals, insurance, and utilities. Sometimes in these cases your score affects your eligibility; other times it affects the deposit amount required. The best rates and terms may require higher credit scores.
- Credit scores do not include factors such as age, gender, marital status, national origin, race, or religion. Such factors are generally protected by anti-discrimination laws and may not lawfully affect your credit score.
- Credit scores do not factor in your job, income or employment history. Credit Scores do not factor in your educational background. Credit scores are not influenced by where you live.
- There are three national credit bureaus – Equifax, Experian, and Transunion. Since your credit score is based on your credit report, you really have three credit scores to keep track of – one for each of the three credit bureaus systems.
- Credit scores may penalize you to some degree for applying for new credit such as applying for loans and credit cards, but it does not penalize you for all inquiries into your credit. For example, ordering your own credit report does not count against you. Also requests for employment purposes does not count against you. And requests for your credit report from existing lenders may not count against you. Basically what counts against you is inquiries into your credit for new credit arrangements.
