Companies that issue credit to customers such as automobile lenders, credit card companies and banks use a scoring system to evaluate a consumer's creditworthiness. Organizations that compile credit scores use statistics of existing customers to determine the factors that contribute to the risk for nonpayment. Companies may not use factors such as race, gender, national origin, religion or marital status to determine credit risk. Insurance companies use credit score to determine a consumer's likelihood of filing claims and the expense of insurance losses. The insurance company considers consumers with a lower credit score more likely to file a claim for a costly loss.
History
The consumer's payment history is a factor in determining the credit score. Those who pay bills late, have filed for bankruptcy or have accounts in collections will have a negative effect on their credit score. The payment history has a positive effect on the credit score for those who pay bills on time, have never filed for bankruptcy and do not have any accounts in collections Payment history has the highest rank for importance, at 35 percent, when calculating a credit score, according to My FICO.
Debt
Creditors consider the amount of debt a consumer has in relation to the available credit when calculating the score. Consumers with multiple credit accounts near the maximum limit will factor into a lower score, according to the Federal Trade Commission. Future Teaching Physicians recommends keeping credit card balances at 25 percent of the credit limit on all accounts.
Number of Credit Accounts
The number of credit accounts a consumer has available is a negative factor when calculating a credit score. Even if consumers use the credit accounts infrequently, the sheer number of accounts can lower a score. According to Experian, consumers without credit history will not generate a credit score at all.
Length of Credit History
Consumers with a short history of paying accounts can have a lower score. Younger credit consumers have not established a history for paying accounts on time, but creditors will consider the timeliness of payments for the accounts that are available. When calculating credit score, the algorithm considers the length of time the consumer has been paying debt. According to Bankrate.com, more points are given to consumers with longstanding accounts with the same credit issuer.
Credit Inquiries
Consumers that apply for multiple accounts will have inquiries on the credit history report. The multiple inquiries can lower the credit score in some scoring calculations. Some inquiries do not appear on the credit history such as current creditors who evaluate a customer's account and companies conducting a pre-screening inquiry to extend an offer. Hard inquiries can lower a credit score. A hard inquiry occurs when an organization checks the consumer's credit history when making a lending decision. Soft inquiries do not lower the credit score and occur when an organization checks a credit score without the intent to make a lending decision. Hard inquiries temporarily lower the credit score for six months, according to The Consumerist.
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