(MP) We depend on credit for so many important things in life — whether it’s for buying a car, house or computer or getting student loans. A three-digit number — your credit score or rating– determines whether you can do these things and how much it’ll cost. The credit rating system is made up of three main players: consumers, credit bureaus, and financial companies. Information about your credit card and loans is reported electronically to the three national credit bureaus by each of your creditors about every 30 days. They are: TransUnion, Equifax, and Experian,. These bureaus collect and store your information for future reference (when someone asks about you).
The three bureaus don’t share information with each other. Your report from TransUnion, Equifax, and Experian can contain extreme differences. Your ratings impact the deals and interest you get when you buy a home, finance a car, rent an apartment, apply for a job, buy insurance, purchase a cell phone, or even opening new credit cards. It’s important to watch all three reports because you can never be sure which one will be used when you apply for new loans or credit cards.
What is a credit score?
Bureau credit scores are often called “FICO” scores,” being that most bureau scores in the United States are produced from software developed by Fair Isaac and Company (FICO). FICO scores are provided to lenders by the major reporting agencies. Credit ratings offer a guide to future risk assessment based solely on credit report data. The higher your score, the lower the indicated risk on loans. But scores alone do not show whether a specific person will be a good or bad risk.
While many lenders use ratings to help them make lending decisions on loans, each lender has its own strategy or system, including the level of risk it finds acceptable for a given credit product. There’s no single ‘cutoff score’ used by all lenders and there are many added factors that credit lenders use to decide interest rates. Remember, credit scoring is just another variable lenders use when underwriting a loan application.
How do credit scores work?
Most ratings are calculated by mathematical equations that rate many types of information that are in your file. By comparing this information to the patterns in hundreds of thousands of past credit reports, the score identifies the lender’s level of future credit risk. In order for a credit score to be calculated on the consumer’s file, the file must contain at least an account, which has been open for six month or longer. Plus, the file must contain at least one account that has been updated in the past six months. This enables that there is enough information -and enough recent information –in the credit file to base a score on.
What does a credit rating consider?
Here are the five main categories that credit scores evaluate, along with their approximate level of importance.
The weight of your credit rating
1. Payment history–35%
2. Amounts owed–30%
3. Length of credit history–15%
4. New credit inquires–10%
5. Types of credit used–10%.
What credit scores ignore?
Your scores consider a wide range of information on the consumer report. However, they do not consider a consumer’s race, color, religion, nationality, sex and marital status. U.S. law prohibits considering these facts when scoring credit, as well as any receipt of public assistance, or the exercise of any consumer right under the Consumer Credit Protection Act (CCPA).