Everyone is always asking about how credit scores a determined. I found this article ( attached below) online that gives a lot of insight, and thought you and your customers might find it interesting as well. Please let me know if you have any questions.
Why is your credit score important
Here’s why your credit score is so important; it helps determine whether you can get credit cards, car loans and mortgages, and what interest rates you will pay.
The three major credit bureaus may report different credit scores to characterize your creditworthiness because they have different information in their files and they use different models to calculate the scores. Credit Scores are generally between 300 at the low end and 850 at the high end depending on which bureau you get the score from.
Lower scores are associated with higher risks of defaulting, so banks and other lenders demand high interest rates for taking risks in offering loans to these “subprime” customers. With higher scores, loans and credit cards are easier to get at lower interest rates because they are associated with successful repayment.
Personal Credit Scores – Your Credit History in a 3-Digit Number
It is important that you know your approximate credit score when you apply for new loans. Your Personal Credit Score on the CreditKeeper website is based on the CreditXpert scoring model which varies between 350 to 850 and rates your score between Very Poor and Excellent. It is provided to help you better understand how lenders evaluate your credit report. It is calculated based on many of the same criteria considered by the leading consumer credit scoring companies, producing in most cases a consumer credit score that duplicates or closely approximates the typical consumer credit score used by banks, mortgage lenders, and loan companies when determining credit worthiness.
What factors make your Personal Credit Score1
Your payment history (35% of your score)
Since borrowers who are current on their accounts generally have lower default risk, the first thing a lender wants to know is how you have paid on your past accounts. If you have delinquencies or late payments, they will impact this factor of your score. The more accounts that show clean payment track record the better your score.
How much you owe, comparing your debt to your credit line (30%)
While having credit and using credit is not bad for your score, extending your borrowing to the credit limit reflects that you may be over-extended and are more likely to pay late or not at all. Your debt-to-credit line ratio is calculated based on the percentage of your total credit card balance to the total credit limit, and the percentage of outstanding principal of your installment loans.
How long you have had credit (15%)
A long credit history gives creditors an idea of your payment actions over a period of time. If you have a short credit history, less is known about your risk and therefore creditors conservatively rate you as higher risk.
When you last applied for credit (10%)
Application for different kinds of loans in a short period of time may represent risky behavior and could mean a big potential increase in debt. This especially affects people who have a short credit history who apply for many lines of credit within a short period.
When you check your report or it is checked for pre-approved marketing purposes, it is called a ‘soft-inquiry’ and does not affect your Personal Credit Score.
The types of credit you use (installment loans, bank cards etc.) (10%)
Your Personal Credit Score is highest when there is a healthy mix of revolving credit and installment loans reported in your credit file.
1A Personal Credit Score is not an endorsement or a determination of your qualification for a loan. Each lender has specific underwriting standards, so you should not assume that you will receive the same evaluation from each lender. In addition, your Personal Credit Scores might not be identical in every respect to any consumer credit score produced by any other company.