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Straight Talk About Your Credit ScoreLike it or not, when you apply for a loan, you're often reduced to a number - and that number is called your credit risk score. Named for software developed by Fair Isaac Corporation, the credit risk score, also called a FICO score, is a mathematical model that credit reporting agencies use to predict the credit risk of consumers. Creditors and lenders, in turn, take that information and use it to make lending decisions. Depending on your score, they will accept or deny loans, or charge different interest rates.
A credit score is separate from your credit report. Your score is derived from the information in your credit report. In essence, the credit score rates your creditworthiness in comparison to that of other U.S. consumers who have any credit history. Your score incorporates the information found in your credit file and takes into account fluctuations in debt payment, the amount of your outstanding debt, and a variety of other data, such as any unpaid property tax liens, overdue child support payments or bankruptcies, and even other credit inquires.
The FICO method of scoring determines your future credit risk by comparing your credit history with the credit patterns established by hundreds of thousands of other consumers. While this score does not specifically determine whether an individual will be a creditworthy customer, the FICO scoring system has established a very straightforward lending rule of thumb: The higher the score (usually between 300 and 800), the more appealing you are to a creditor or lender.
Typically, lenders will want to know your credit score before financing a major purchase in order to gauge the likelihood that they will be repaid. Credit scores give lenders a fast, objective measurement of your credit risk. Before the use of scoring, the credit granting process could be slow, inconsistent and unfairly biased. Today, the use of credit scores allows for speedier loan approvals and helps promote unbiased lending decisions.
Your Shifting Risk Score
As your credit history changes, so will your credit score. In other words, your credit score from a month ago is probably not the same score you would receive today.
Many different formulas are used to calculate credit scores, but most calculations are based on the following factors:
In many ways, the use of credit risk scores has leveled the playing field for consumers. Using credit scoring, lenders can focus only on the facts related to credit risk rather than on their own personal judgment. Under the Equal Credit Opportunity Act , such factors as your gender, race, religion, nationality, marital status and income are not taken into consideration when your credit score is evaluated.
If you need help learning how to obtain or interpret your credit score, talk to a certified credit counselor. Remember, - trust your personal financial information only with a certified member of the National Foundation for Credit Counseling (NFCC) . Also, look for the BBBOnLine Reliability Seal - this is one way to ensure that the business will deliver on its promises both in the real world and the virtual world.
Make the most out of your next purchase by securing the best rates and most qualified lenders. Before applying for your next big loan - whether it is for a car or a home -improve your credit score first so you have more lending options. And if you need to, find the help of a professional. When it comes to improving your credit, there's no substitute for knowing how to interpret and improve your credit score.