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Credit Report Score: What's Your Number? |
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The ambit of the utility of credit report score has spread beyond one bank's small business loan department and is now applicable for a variety of purposes such as an application for a credit card, an auto loan or a home mortgage. It is also applicable when you buy an auto or get a homeowner's insurance. Apart from helping to determine whether you will qualify or get rejected for a loan, a credit report score also determines the interest rate that will be applicable. The better your credit report score, the lower will be your expenses. Unlike the moods and fancies of a lending officer, credit scoring is objective. However, being objective also means that if you've missed payments, defaulted on loans or declared bankruptcy, that data will be incorporated into your score, bringing it down. Moreover, personal charm will have no role to play if your score is low. The only thing that can help you is your determination to improve your score. If you make a loan application, the lender will obtain your credit report from the credit bureau and then he will analyze the large data, both positive and negative, contained in the report. However, it is difficult to accurately assess the creditworthiness of the borrower by merely looking at the report. As such, the credit bureaus have developed models that are the most powerful indicators of future risk by weighing the data and producing a credit report score that is indicative of the amount of risk. Based on this score, the lenders can decide whether they would take the risk of granting the credit. There are three factors which determine your credit report score: severity, recency and frequency. As far as severity is concerned, a 30-day late payment is not as serious as a 90-day late payment and one late payment is not considered as severe or risky as several late payments. In terms of recency, a lender is not concerned about a credit lapse of four or five years ago, if you've been paying your bills regularly since then. Your credit report score is also affected by credit availability. You can't demonstrate that you have been approved for credit and have been making payments regularly, if you do not have any cards at all. Having many cards with a huge overall credit line or high outstanding balances can be a worse risk indicator. According to Fair, Isaac data, it is best to have two cards which will indicate lowest risk level whereas if you have seven cards or more, your credit score will come down. Credit report score doesn't consider certain factors which have not been proven to be reliable indicators of the risk factor, such as your income, the neighborhood where you live or where you work and the number of years you've been at your current job. Young people, who are just starting their careers can benefit from this as long as they manage their debt judiciously and do not misuse the first credit card as that can damage their credit score for many years. To see how much your reckless spending and late payments have hurt your credit report score, it is not enough to get a copy of your credit report as the score would not be indicated in it. You might be able to get to know your score with the help of a bank loan officer or an auto dealer's credit manager. You have to know the scale and the cut-off points to understand the implication of the credit score. The Fair, Isaac score or FICO score is the most commonly used for home mortgages. In some cases, a loan officer can enter your data in a computer and come up with your score within a minute or two. The range of FICO scores is from 300 to 900. Whereas it is generally impossible to achieve 900, there are very few in the 800s also. Normally the scores are around a mean, with a bell-shaped distribution. Any credit report score of 680 or higher is considered a premium-quality borrower and possibly will qualify for a lower rate on a mortgage. A score of 620 or lower is high-risk category. |
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