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How Credit Scores Work
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How Credit Scores Work

History

The credit scoring system became prevalent during the 1980's as a way for lenders to quickly evaluate a potential borrower's creditworthiness. This came about in an effort to streamline an easy and consistent way to evaluate a consumer’s credit. The system was developed to accurately predict financial risk over time and grew to several different industries. Now credit scoring is used by lenders, insurers, landlords, employers, utility companies and even judges to evaluate your credit behavior.

The Formula

Thousands of different credit scoring formulas exist today for various evaluation purposes. Each unique credit scoring formula is accurate and correct for its own application. The credit scores you can order online use a mathematical formula created for consumers that approximates these different formulas. Your online credit scores may vary a bit from the score your lender uses but they are typically within in the same range and represent the same level of creditworthiness.

The basic credit scoring formula takes into account several factors from your credit report. The impact of each element fluctuates based your own credit profile:

Applying for new credit
  • Payment history - A good record of on-time payments will help your credit standing.
  • Outstanding debt - High balances in relation to your credit limits can harm your credit. Aim for balances under 35%.
  • Credit account history - An established credit history makes you a less risky borrower. Think twice and consider consulting a credit coach before closing old accounts.
  • Recent inquiries - When a lender or business checks your credit, it creates a record of the credit check called an inquiry. Too many inquiries can be considered a negative so think twice about applying for all those offers that come in the mail. If you provide your social security number to a financial institution it is likely a credit report will be ordered. Apply for new credit in moderation and only as needed.
  • Types of credit - A healthy credit profile has a balanced mix of credit card accounts and loans (home, auto, etc.).
Money Matters

When you are preparing for a major purchase make sure you check your credit scores and credit reports from all three credit reporting agencies: TransUnion, Equifax and Experian. Looking at your scores and reports a few months before your loan application along with establishing a plan to improve your overall credit profile will help you get a complete picture of your credit health. Worried if your credit score is good enough? If your credit score is above 750 you will have a much better chance to qualify for a preferred loan or credit card program. Under 650, you may have trouble receiving new credit.

If your credit score is less than desired, pay your bills on time, reduce your debt, remove inaccuracies and avoid new inquiries for a few months. Plus, don't forget that your credit score is not the only factor a lender may look at when they are evaluating your financial standing. A professional credit coach can work with you to help you understand your credit profile along with your short- and long-term credit needs. Your coach can then help provide you resources and guidance to thoroughly review all the key parts of your personal debt and credit profile and help you establish an action plan.

The ApprovalGUARD Service - Is the first and only service of its kind. Each ApprovalGUARD customer is assigned a personal credit coach to help them understand, evaluate and optimize their credit and debt profiles. The ApprovalGUARD Service additionally provides each Full Service customer with credit reports, credit scores, continual informative credit tips and education, and tools to more effectively manage and analyze their credit and debt profiles. Go to www.ApprovalGUARD.com and use the promotion code: REMAX1 for your free 30 day, no obligation trial.

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