Improving your credit report – Part 1

Did you ever wonder how it is you can go online and be approved for credit within 30 seconds?

How about getting pre-qualified for a car without anyone asking about your income?

Why do you get one interest rate on loans while your neighbor gets another?

The answer is your credit score.

Your credit score is a mathematical number that is generated by a mathematical formula based on the information provided in your credit report. Compared to the information of millions of other people. The resulting number is a prediction of how you will pay your bills. Thus making the accuracy of the information contained in each of your credit reports extremely important.

Credit scores are used extensively and if you have ever gotten a loan for a car, mortgage or even a credit card, the rate that you received was in relation to your credit score. The higher the score, the lower the interest rate. Lenders use a variety of different models to determine your credit worthiness but the most common is the FICO score developed by the Fair Isaac Company. Their scale runs from 300 to 850. The average consumer will score between 600 and 800.

Fair Isaac reports that the American public’s credit scores break down as follows:

499 and below 2%

500 to 549 5%

550 to 599 – 8%

600 to 649 12%

650 to 699 15%

700 to 749 18%

750 to 799 27%

800+ – 13%

The exact formula for determining the score seems to be a closely guarded secret, with only vague explanations on how the score is calculated. To make matters even more confusing, each of the three major credit bureaus has their own version of the FICO scoring method. Equifax has the BEACON score, Experian has the Experian/Fair Isaac Model and TransUnion has the EMPIRICA score, each using different formulas.

But there does seem to be some ray of hope on the horizon because the credit bureaus collaborated on a standardized scoring model called the Vantage Score. The score range is between 501 and 990 with a corresponding letter grade, A through F, with a school-like grade of A being the best. But until this scoring model catches on, consumers will continually be confused.

No matter which type of scoring method is used, it is vitally important to have the best credit score possible. The better the score, the better he interest rate. According to Fair Isaac’s website, a score of 520 will receive an interest rate 4.36 percent higher than a consumer with a score of 720.

To put this in perspective, a $100,000, 30 year

Tagged with: Credit Worthiness • Interest Rate • Major Credit Bureaus

Filed under: How To Make My Credit Better

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