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Understanding Credit Scores by Don Troiano
Understanding Credit Scores- By Don Troiano
Unfortunately the actual methodology of credit scoring is a closely guarded secret of the credit reporting industry, but there are some simple factors that we know are included in to a credit score and many of them make perfect sense. Some of the factors seem unfair and others make no sense at all. I will outline them for you here.
1) Zip Code- Yes your zip code is actually considered in your credit score. The best reason I can come up with is if you live in a more or less affluent community your more likely to pay on your debt. This is considered a very small part of your score.
2) Time at Current Address- Needless to say if you move around often it is more likely that you are not secure in your life and finances and therefore more likely to default on debt. This is also considered a very small part of your score.
3) Time at Your Job- It is fair to say constantly switching jobs is usually not a good thing. Perhaps the borrower is a bad employee or unreliable and are more likely to default on debt. This is considered a small part of the score.
4) Amount of Credit Inquiries- Within a credit report is a list of inquiries within the last 90 days. What this tells the scoring model is how much new credit a borrower is applying for. If someone is out applying for a great deal of credit they may become over extended and unable to pay. This is usually a small part of the score unless the borrower has many inquires it can add up to quite a bit.
5) Amount of Available Credit- A borrower who has a great deal of available credit could possibly use it and over extend them selves. This plays a larger role in the score depending on the age of the new available credit.
6) Age of Debt and - The longer a borrower has a credit line without a problem the more likely that borrower is responsible and can manage their debt. This plays a much larger role in the score.
7) Amount of Available Credit Used or over limit – Simply put this is how much of borrowers credit lines have been used up. If a borrower’s credit cards and credit lines are maxed out they are probably close to default. If the borrower is over the limit this will impact his score very much. The other side of the equation is if a borrower had used up a high amount of his credit limit and has paid it way down he has shown a good ability to pay his debt. This is a major part of credit scoring as it shows a good snapshot of a borrower’s financial position and responsibility.
8) Delinquencies New and Old- Delinquencies are always bad for a borrower’s credit score but delinquencies that are new shows that a borrower is in trouble right now. Older delinquencies tend to carry less weight in the scoring system over time. A credit line is not reported as delinquent till it reaches 30 days and is reported as 30,60,90 and 120 days late. Someone who is 25 days late on everything is not considered delinquent. This is a major part of a credit score.
9) Serious Delinquencies- While all delinquencies are bad serious delinquencies are worse. For instance 30 days while bad is far better then 60 or 90 or 120. This is a major part of a credit score.
10) Type of Debt Delinquent- Again while all delinquencies are bad there is a weight given to the credit line. It seems to go mortgages are the highest followed by car loans, credit lines and lastly credit cards. Clearly if a borrower is 30 days late on his Discover card it is far less important then his mortgage or car loan. This plays a major part in a credit score for obvious reasons.
11) Judgments and Collections- Judgments and collections are usually the result of defaulted debt like a credit card or medical service. And while it would seem that these are also very important they play a lesser role particularly if they are older. This plays a role in scoring, but as previously stated it can vary depending on age and type of collection or judgment
In conclusion knowing the factors in a borrowers scoring can be an important tool to gaining great credit scores. Keeping inquiries to a minimum and quickly paying down debt also can help boost a credit score quickly. Most borrowers do not manage their credit till the time comes when they need to borrow. Keeping a constant eye on a borrowers credit profile will ensure they will receive the best terms they deserve always.
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