Not only states and large corporate entities have the credit score – if you have ever applied to the bank for a loan, most likely, your data got into the centralized agency that set you a certain score. What is this score, what does it include and how is it possible to have impact on it?
When you go to the bank for a loan the next time, your financial status will be evaluated not only according to your income statement. To obtain detailed and reliable information about the customer, the bank asks the credit bureau, or scoring agency – an organization that collects credit reports from various banks, brings together data and makes its assessment of creditworthiness of the customer – a credit score. This estimate affects directly the decision of the bank to grant you a loan and its conditions.
Different credit bureaus apply different systems of evaluation, but they have one basic principle – statistical information about a plenty of borrowers is summarized and analyzed in order to get a sample model of behavior for different groups of clients.
The system of credit scores has its advantages and disadvantages: the positive side is the speed of making decision and opportunity for banks to work with a wide range of clients, without running an excessive risk; but the basic drawback is that your score depends largely on the behavior of others, which you are not able to affect in any way. But the substantial part of the evaluation is determined by your own credit report, so it is crucial to understand the algorithm of assessment – and to use it to your advantage.
Smart Money Daily considers five factors that have impact on the assessment of FICO (Fair Isaac Corporation – the world’s most famous scoring agency founded in 1956 by engineer Bill Fair and mathematician Isaac) – regularity of charges on the credit (35%); the current total amount of arrears (30%); how long do you use the loan (15%); the last time when you applied for a loan (10%); what credit you use (10%). Although when counting the credit score a complicated mathematical models and methods are used, and it is possible with a high degree of reliability to detect the major factors and their affect on the final score. These principles are used in all today’s models of evaluation of individual borrowers’ paying capacity.
Those who managed to get a loan for any purpose certainly have to order credit reports regularly. These reports can show you a real picture of your credit but in many cases the reports are very complicated to understand. Here you can make use of credit report monitoring service – they will make the reports easy to understand.