The credit score is one of the most important factors that affect our lives as consumers. Not only does this information determine our eligibility for loans and credits, it also reflects how we handle financial responsibilities and how capable we are in doing business with others. That is why, it is very important to have a good credit score. But if you have already messed up your credit score, do not fret! There is still hope for you! In this article, we will be discussing how credit scores works, activities that affects your credit rating, and more importantly, we will discuss a total do-it-yourself guide to credit score repair.
Know how credit score works
Based on the 2006 Consumer Action Study, almost 30% of the total American population with credit history has never even checked their credit reports. This is a sad truth when knowing your credit score and how it is computed is the very basic step to credit score repair.
Credit Scoring is basically an evaluation, represented by a three-digit number, assessing one’s total credit worthiness and possible credit risks one may pose for credit providers. Credit score is used in credit and loan applications, to even some employment decisions.
There are several ways to calculate credit scores. The most used method is the FICO score, derived from the company Fair Isaac Corporation which started this formula in evaluating credit scores. Using this method, the credit scores ranges from 300 to 850; whereas a credit score of 700 or higher is a very good credit standing, and a credit score of 499 means bad credit standing.
United State’s main credit reporting bureaus are: Equifax, Experian and TransUnion. Each credit bureau has its own scoring method. Beacon Sytem is used by Equifax, Experian/Fair Isaac System is used by Experian, Empirica System is used by TransUnion. However, all these scoring methods are based on the FICO method, variations made by each credit reporting agency provides 3 different scores for one individual. That is why on 2006, the three credit bureaus developed the unified credit scoring method, the Vantage Score. Vantage Score offers a more consistent credit scoring method, regardless of the credit reporting agency.
Aside from the two discussed scoring methods, there are alternative scoring methods also used like Anthem Score, PRBC Score, FICO Expansion Score, and efunds.
Although the credit scoring method may vary, credit scores are always computed on the following factors:
• Payment History- Payment history comprises about 35 percent of your credit score, referring as to whether you pay your bills on time, number of delinquent accounts and whether you have filed for bankruptcy.
• Outstanding Debt- For about 30 percent of the credit score, total amount of debt outstanding is taken into consideration.
• Credit History- The length of your credit history accounts 15 percent of your overall credit score.
• Credit Types-To have different kinds of debts (credit cars, loans and mortgages) helps improve about 10 percent of the credit score.
• Credit Inquiries- Credit inquiries made by new loan providers and creditors somehow pull down and affect 10 percent of your credit score.