How Credit Scoring Works

Credit scoring was an industry mystery for many years as financial institutions kept this information to themselves. However, since the Fair Credit Reporting Act, you're entitled to one free credit report fromAnnualCreditReport.com each year, which helps demystify the process with credit scores explained. Now, you can see who reported you for missed or late payments, if your credit score was checked and by whom, and the rest of your financial profile. When all is said and done, there will be a three-digit number that will quickly let lenders know how risky you are as a borrower and will affect your access to lines of credit.

There are five main areas that affect your credit scoring: Paying bills on-time (35%), how much outstanding debt you have and how much you're using of the total amount offered (30%), the length of time you've had credit (15%), the number of inquiries into your credit (10%) and the type of credit you have (10%). Additionally, the last 2 years of activity will account for 60% of your total score, which means that your past mistakes will still be on your credit score report, usually for 7-10 years, but you can begin to turn things around within the first 12 months of faltering. When applying fro a no fax payday loan you are not required to have a credit check done

The Fair Isaac Company invented credit scoring in 1958 as a quick, easy way to assess the potential risk associated with lending to certain people. This number, which is sometimes called a FICO score, is generally between 300 and 850, and the higher the better. When you pay a bill late, your score could drop anywhere from 10-100 points. If you've undergone a foreclosure, then you could see your credit score decrease of as much as 300 points! We often lose sight of the fact that every financial decision we make is being recorded and while it may seem too easy to say "I'll just pay that off when I get the money," the points are whittling away off our credit scores.

According to the Consumer Federation of America, consumers nationwide could save $16 billion a year in lower credit card finance charges by improving credit scores by an average of 30 points. Credit scoring can be confusing because the point system isn't clearly spelled out to us, even though we are entitled to one free credit report each year from www.AnnualCreditReport borrowers wonder, "How much does my score drop from one 30 day late payment?" or "How many points will I lose if my account goes to collections?" or "How will a foreclosure affect my credit future?" While the answers are complex, there are many tips financial advisers spell out for us that can redirect our focus to the most important areas.

If you are to take away one lesson about improving your credit scores range, it's this: late or missed payments are bad, very bad. Payment history accounts for 35% of your credit score and includes everything from mortgage or rent to utilities, cell phone bills, credit cards, store charge cards, medical bills, auto loans, college tuition bills and student loans. If you are 30 days late on one payment, then it's not likely to cause severe damage to your report. It's only listed when you are "currently 30 days late" and even then, you can usually negotiate with your lender to cut you some slack since you're normally a good borrower. If you're often 30 days late, then you may have a hard time convincing anyone to give you a favor. Once you're sixty days late, your credit score will be slightly damaged, but when you hit more than 90 days you'll have a tarnished score, which could be something like 100 points deducted for up to 7 years! After 120 days, it's likely you'll have a charge-off on your record or an account that slips into collections. Short-term collection accounts will hurt you 50-75 points, although financial advisers at the Gallant Group say that older accounts won't hurt you as much, as these are just "a blip on the radar screen," they said. However, if you're applying for a new loan, then you may occasionally be required to go back and resolve any past due items on your report before being approved.

The most damaging "big ticket items" on your credit scoring are bankruptcies, foreclosures and repossessions. A bankruptcy credit report is the quickest way to derail your score, with the longest-lasting effects. One claim can plummet your score down to the mid-400s for the first year. If you engage in smart finances over the next year, then you may be able to resurrect your credit score back to the 600s, yet lenders will still see "bankruptcy" on your files for ten years. Foreclosures are just as ugly and hurt your chances at getting approval for another mortgage in the future. Credit scores usually drop to the low 400s because so much delinquent activity gets reported; first the monthly missed payments, then the subsequent foreclosure hit. Repos are the least damaging of the three, but will still knock a perfect score down to the low to mid-500s.

You may be wondering, "How much will a few late payments hurt my credit scoring?" According to Gallant Group, 30 days late on a mortgage, car loan or credit card will likely drop your credit score down at least 50 points. Being 60-90 days late on an account or being 30+ days late on multiple accounts will take 100 or more points off. Once you are 30 days late on a mortgage payment, you'll also be in the subprime credit bracket for the next 2 years, so you definitely don't want to miss that payment!

In credit scoring terms, 30% of your total number is derived from the outstanding debt you have, your credit limits and how much you've borrowed of the total extended to you. If you have an auto loan or a mortgage and you are paying the full amount every month on-time, then this will contribute to good credit scores. Look at your credit card limits. If you have charged up 40% of the total amount without paying it off right away, then your credit score will drop 10 or 20 points. Anything over 40% will result in exponential drops, which could be as much as 100 points. If you have multiple, maxed-out credit cards, then rest assured you that your score will be off by at least 80 points.

Some people are obsessed with credit inquiries and fear that anyone checking their credit scoring will diminish their good standing. What many people don't know is that it's ok to shop around. Say you are looking for auto loans and get quotes from 3 or 4 different places over a period of 14 days: that will only count as one inquiry's worth of points and will only cost you 5 or 10 points for the next 30 days. The reason inquiries cost you any points is that, statistically, people with six inquiries or more on their credit reports are eight times more likely to declare bankruptcy than people with no inquiries. You won't lose any points using credit report services as much as you like, though. Just be conscientious about applying for a bunch of new credit cards all at once. No credit check loans do not affect your credit scoring in some cases.

Generally speaking, things that positively affect your credit scoring include such things as paying your bills on-time, paying your bills in full, using 25% or less of your available credit and maintaining steady employment. Things that negatively affect your credit score include late or missed payments, using more than 80% of your total available credit, bankruptcy, liens or foreclosures, periods of unemployment or too many requests for new lines of credit. Good credit scores are important for many reasons, from credit card interest rates and auto loan financing to mortgages and personal loan opportunities.

There are many myths about credit scoring, but here are a few. The first myth is that closing accounts can improve credit scores. The reality is that you can't repair an account by simply shutting it down. When you close an account, your total available credit shrinks, which makes your situation look worse. Closing accounts also makes your credit history appear shorter. Instead, pay down your debt. The second myth is that checking your FICO score can hurt your credit. You can check your score as much as you want, although you're only entitled to one free credit report each year. Credit lenders checking your score to send you new offers won't impact your number either. Applying for new lines of credit is what actually affects your score, although you can shop around for auto loan quotes and mortgage quotes as much as you want within a 14-day period, since it's only counted as one inquiry or 5 points off for 30 days). Another myth is that credit counseling is as bad as bankruptcy. Your credit counseling program will not be explicitly stated on your report, although your lenders may report you as late and any settlements made may show up on your report, all of which can hurt your score. This is nowhere near as damaging as bankruptcy, but it's best to turn to credit counselors only if you're seriously derailed and need those settlement offers.