Credit scores, also referred to as credit ratings, are numbers that measure individuals' likeliness to repay their debts. Equifax, Experian and TransUnion -- the consumer reporting agencies -- calculate these three-digit numbers using the Fair Isaac Company's FICO scoring program. FICO ratings range from 300 to 850, with low scores representing poor credit and high scores representing good credit. Your credit score can impact you in several ways.
Your FICO Score is Based On Your Credit Report
Your FICO rating derives from the data on your credit report, a document listing all of your current loans, cards and other credit accounts. Additionally, your credit report lists negative information like tax liens, bankruptcy and foreclosure. If an item does not appear on your credit report, it will not affect your score at all. For instance, utility bills, traffic tickets and cable payments do not directly affect your credit score. However, if you fail to pay such bills, companies may report your nonpayment to the credit bureaus as collection accounts, hurting your FICO score.
Bad Credit Doesn't Last Forever
You credit score will drop in response to certain financial issues, including late mortgage, auto loan or credit card payments, collection accounts, judgments, tax liens, foreclosure, charged-off accounts or bankruptcy. Although these items do cause long-term damage to your credit score, their effects do not last forever, according to the Fair Isaac Corp. Instead, most bad credit items drop off your credit report after seven years, while bankruptcy will disappear from your credit report after 10 years. Additionally, the effect of bad credit items on your FICO score lessens with time, so your score will gradually improve as time passes after a negative item shows up on your credit report.
Credit Scoring Does Not Factor in Personal Information
Some people have the misconception that credit scores factor in personal data such as ethnicity, age, nationality, marital status or income level. This is not the case, according to Fair Isaac. The Fair Credit Reporting Act, a federal law, prohibits credit bureaus or scoring algorithms from considering the aforementioned factors when assigning credit scores. Instead, credit scores derive solely from the information on your credit report.
Lenders Consider Factors Other Than Your Credit Score
Your FICO score is only one determinant of your ability to get credit cards or home, student, automotive or mortgage loans. Banks and lending agencies consider other financial factors, including your income level, employment status and overall credit history along with your FICO score when deciding whether or not to approve you for funding. A lending agency may deny credit to someone with a high FICO score but a low income, while approving someone with a lower credit score and higher income.
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