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Building a Credit History
You start laying the foundation of your credit history the first time you borrow.
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growing - amount of information about how consumers use credit.
And you can be sure that when you apply for credit, whether it's as
routine as asking for a new credit card or as significant as applying
for a
mortgage,
potential
creditors
will check out your credit history. |
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MAKING HISTORYThe three major national credit
bureaus - Equifax, Experian, and TransUnion - collect two types
of information about you. The first is how you use credit, from
how much you owe on car loans, mortgages, and credit cards to the
timeliness of your monthly payments. There's an incredible
amount of data that falls into this category - about two billion
items a month, which breaks down to an average of 11 items per credit
user.
 Credit bureaus also store public information
about you that might influence the way lenders evaluate your creditworthiness.
This can include anything from records of bankruptcies and foreclosures
to court judgments and divorce proceedings. But credit bureaus don't
gather any personal information that isn't directly credit-related,
such as what you spend on rent or utilities, or anything you pay
for in cash.
Credit bureaus make the information they've
collected available - at a price - to creditors, banks,
potential employers, landlords, and others who have a legal right
to evaluate you based on your use of credit. Most information remains
on your report for a number of years, and damaging details can continue
to appear for up to seven years even if the account is closed or
inactive. Bankruptcies can stay on your report for up to ten years
unless the state where you live imposes a shorter limit.
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WHO'S KEEPING SCORE?Did you ever wonder why it takes a retail store
or an online credit card company just a minute or two to approve
your application for credit? Did you know that you may be quoted
one interest rate on a car loan while the next person to apply is
offered a higher - or lower - rate? These kinds of things
happen because credit decisions often come down to the credit
score, or FICO
score, you're assigned by the credit
bureau your potential creditor contacts.
All credit bureaus use a process called credit scoring,
or credit modeling, to evaluate the risk you pose to a potential
creditor. According to Fair, Isaac and Company, the firm that developed
the software some bureaus use to do the calculation, the score depends
on five main criteria:
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Your payment history, and specifically whether
you pay on time
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The total amount you owe
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The length of your credit history
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How often you apply for credit
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The types of credit you use
Creditworthy behavior in these categories works in your favor, while
risky behavior works against you. And while there are general standards
for the way the criteria are applied, there are no fixed rules. Credit
bureaus aren't required to explain the way they arrived at your
particular score. All they are required to provide are up to four
reasons for the score, which the lender must tell you if you ask why
your application was denied.
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WHAT'S THE SCORE?When you get a FICO credit score, a high number
is better. The top 20% of reports that are evaluated get scores
over 780, while the lowest 20% get scores under 620.
Each lender sets its own standard for what qualifies as an acceptable
score, and determines the interest rate for which you qualify based
on your score. The best rates - in this case, the lowest rates
- go to applicants with the highest scores. Applicants with
low scores, sometimes called sub-prime borrowers, may be offered
credit at higher rates if they are not simply turned down.
Credit scoring has its advocates and its detractors.
Those in favor say that, in addition to the advantage of speed,
lenders get a fairer picture of your creditworthiness with this
statistical snapshot. Critics argue that reducing all the information
about you to a single score can provide a distorted picture. They
also say that a lender can find it easier to say no on the basis
of what appears to be a value-neutral system.
WHAT THE LENDER KNOWSLenders may go beyond your credit score in evaluating your application.
For example, they may want to know the amount you earn, whether you've
been at the same job for two years or more, and if you've lived
at the same address for a period of time. In addition, lenders may
be more willing to grant you credit if you already have banking or
investment accounts with them. |
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© 2008 by Lightbulb Press, Inc.
All Rights Reserved.
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