We all know that our financial transactions are reported to
credit agencies that track how well and how quickly we pay our
debts and that when we apply for a loan for one reason or
another, those agencies report our credit history to
prospective lenders. However, most of us don't know a great
deal about how that actually happens and how our credit is
rated.
The fact is that credit reporting has evolved to an industry
all of its own. Just a few short years ago, when someone
applied for a loan, he or she put down credit references -
retail stores, banks, or other people or places with whom they
had done business in the past. As a matter of course, the
lender checked the references and decided whether or not to
grant a loan based on an amalgamation of the responses from
them. That really isn't the case any more.
Instead, there are three major agencies that track everyone's
credit and provide a credit rating when contacted by a
potential lender. The three agencies are Equifax, located in
Georgia; Experian, located in Texas; and Trans Union, located
in Pennsylvania. When someone applies for a loan, the lender
generally contacts one of these three agencies and obtains a
credit score and the score helps the lender decide whether or
not to make a loan.
Credit Scores
How is a credit score calculated? Until recently, that was one
of life's great mysteries, but over the past few years new
rules and regulations have made the information more readily
available. Your credit score is a number that ranges from 300
to 900, although the exact formula for determining that number
is proprietary and is not released. This is how it works in
general.
· 35% of the score is based on the history of how you have (or
have not) paid your bills. The agencies track how many of your
bills have been paid on time and how many haven't, as well as
whether or not any of them have been referred for collection.
The more recently you have had a collection or failed to pay
something on time, the worse your score will be.
· 30% of the score is based on the debts you have at the time
of the rating. It is includes car and home loans, credit card
debt, retail store debt and the like. If you have several
credit cards and they are all limited out, your credit score is
lower.
· 15% of the total score is based on how long you have had
credit. If you have never had credit or have only had credit
for a short time, the lower your score will be.
· 10% of the score is based on the number of inquiries that
have been received about your report, particularly if there are
several in the past year.
· 10% of the score is based on your current credit and the
types of credit you have. The number of credit cards and loans
you have, as well as the available credit you have on your
credit cards and considered.
Because your credit score is based on these factors and they
are constantly changing, your credit score changes along with
them. Therefore, there are things you can do to change your
credit rating and bring it up.
Changing your Credit Rating
The first thing to do is get a copy of your credit report and
make sure there aren't any mistakes on it. If there are, take
steps to get them corrected. Errors in reporting do occur,
although the credit bureaus would like for you to think they
are foolproof. Here are a few more tips to improving your
credit rating.
· Don't pay off the entire balance on your credit card. Keep
about 75% of it paid and keep a 25% balance. This applies to
multiple credit cards as well.
· Don't get rid of your older accounts. Keep them open. The
credit reporters look at the age of your accounts and the
longer you have had a particular account in good standing, the
better.
· Pay your bills on time. Experts say that this is probably the
most important factor of all.
· Prevent inquiries to your credit report whenever possible.
Your score drops with the number of inquiries.
The real key, however, is to only get credit when you need it
and when you do get it, use it wisely. You can damage your
credit rating with just a few late pays or collections and it
may take up to a year of paying everything on time to build up
a better rating.
About The Author: Max Hunter is the author of many credit
related articles. If you are looking for help with Payday loan
or any type of faxless loans please visit us at
http://www.PaydayLoanChoice.com
