Know Your Credit Options
Responsibly managing your money includes the use of credit. Using credit wisely involves making on-time payments, keeping a balanced mix of accounts and maintaining a good credit score. These components are key to understanding how credit works and to help know your credit options. Consequently, good credit behavior is essential to financing a home, vehicle, getting car insurance, and securing a new job.
With this in mind, we discuss where credit information comes from. In addition how scoring works, scores lenders use, and the types of data checked by credit reporting agencies.
Credit Information Sources
Everyone has a credit profile made up of information about their financial activities. In fact, information in a credit report is generated from the financial actions you engage in. In addition, credit reporting agencies gather information about consumer credit activity to include in credit reports.
Your credit information is transmitted by companies you’ve done business with, public records, lenders, mobile phone company, and employers.
Furthermore, data submitted to the reporting agencies includes records containing name, date of birth, social security number and employer. Similar to the information you would include on a credit application.
In addition, companies who you have opened an account with, report your credit information to the credit reporting agencies. This data includes your payment history, total amount owed, date of account opening or closing and any collection activities. Each piece of data comes together from multiple sources to create your credit profile. This credit profile is a key financial tool to help you know your credit options.
What is Credit Scoring, and How Does it Work?
Also, credit scoring is an important step in creating your financial standing. A credit score is assigned based on data reported to the three main credit bureaus (Experian, Equifax, and TransUnion). The resulting credit score allows creditors, or employers to quickly evaluate your financial history without reviewing your credit report completely.
Especially relevant, credit scores range from 300 to 850 for both vantagescore.com and FICO. An individual credit score changes based on the information collected from your credit report.
Most noteworthy, credit reporting agencies evaluate the data reported and develop a credit score that includes the following information:
- The number and type of accounts
- On time payments
- Available credit
- Accounts in collection
- The age of accounts
- Amount of total debt owed
For instance, FICO scoring breaks down or weights the following types of financial activities to determine your overall credit score:
- Amounts owed (30%)
- New credit (10%)
- Length of credit history (15%)
- Payment history (35%)
- Credit mix (10%)
Therefore, a good blend of account types, never missing payments, established accounts and lower balances help improve your credit score. However, each credit scoring model varies slightly, resulting in different scores from each of the three main credit bureaus. Ultimately, the higher your credit score, the better lenders and other creditors view you from a risk viewpoint.
Supplemental Lender Scores
In addition to your credit report and score, creditors have additional scores they use to make a lending decision. These tools help paint a better picture of your financial behavior and potential risk.
The behavior score is a risk tool used by lenders that includes information containing payment amounts and credit utilization. This additional credit scoring tool can include the entire history of an account.
Furthermore, creditors also use a bankruptcy risk score to give them more certainty in a loan or credit decision.
With a bankruptcy risk score, lenders can look at detailed spending habits, including purchases completed. Using a risk score allows lenders to look at how likely a borrower is to file bankruptcy in the future. As a result, the higher the risk score, the less likely you will receive an approval.
In addition, insurers also use an insurance score to assess levels of credit risk. Insurance scores evaluate the probability of loss for an individual based on the potential likelihood of future claims. Insurers won’t exclusively look at an insurance score to evaluate the cost of coverage. However, it may become a factor in determining the risk they accept in providing insurance.
Data Used by Credit Agencies
Credit agencies look at credit information to generate your credit report and ultimately determine your credit score. That data includes the following:
- Public records and collections – bankruptcies, foreclosures, lawsuits, wage garnishments, liens and judgments
- Credit inquiries – loans, credit cards, or other new accounts applied for
- Trade lines – including credit cards, and loans accepted
- Identifying data – past employment history, residential address, social security number, and date of birth
The data in your credit report relating directly to your financial behavior is used to create your credit score. In addition, each credit reporting agency differs slightly in how they calculate your credit score. However, the FICO scoring is usually a good measurement. The different data outlined above over the course of your financial life can influence your total score.
Understanding how credit reporting and scoring helps you know your credit options is an important first step for every homebuyer. Most of all, it is an important action toward building a strong credit profile. Which ultimately provides an easier path to meeting your financial needs now and well into the future.
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