Improve Your Credit Standing – Know Your Credit Options

man with bag of debt strapped over his shoulders trying know your credit options

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.

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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:

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  • 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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6 Comments

  1. Only recently did I realise that more accounts, as long as they are kept in check, equated to a better score. I hadn’t had a credit card or loans for years and it counted against me. I have now resolved this but it is very useful to see the scoring breakdown just in case I need to dust down my credit score again in the near future

    Cheers,

    Dean

    • Hi dean – Thanks for your comment. You are quite correct when you say that having more accounts, but keeping them under control leads to a better score.

      Understanding how a credit score is weighted gives consumers the ability to improve their score by focusing on the most heavily weighted portions.

      If you have several accounts with amounts owed below each credit limit, you should end up with a credit score that gets you preferred rates when you borrow.

      Glad the post was helpful.

      Patrick

  2. Your information was very informative regarding how credit works. I was able to get a very clear picture so it easy to understand.

    It was helpful to have it so easy to read and understand.

    I see that the factors are in percentages. Is this handled the same for most credit raters or how does that work? It seems difficult to determine that.

    Is there a charge for your services?

    • Robert – Thanks for commenting. I’m glad you enjoyed the post and that it was easy to understand.

      The percentages you refer to are the weightings used by FICO to calculate your credit score. The score derived by FICO is used by the credit reporting agencies and others to determine you credit worthiness.

      The more weighting assigned by FICO the more important that category is to your overall score. So, if you want to improve your score, focusing on amounts owed 35% and payment history 30% would be the best place to focus first.

      Presently, I don’t offer any services other than the free information I provide here on this site. If you have other questions or you are looking for help with a credit problem not addressed on this site, please reply and I will be glad to assist you.

      Patrick

  3. Hey, Patrick, you have covered a lot of information. I have heard so many different ways that the credit reporting agencies report your credit worthiness. I have filed bankruptcy once in my early 20s and it took a long time for me to get to the point of a credit card company extending me credit. Not knowing how all of this works. I just followed the crowd sort of speak. Today my credit is in better shape than it has been in the past. I guess it is called being responsible.
    If I have a credit card with a limit of 500 dollars. How much of that should I allow as a monthly balance? If I max it out will this cause my credit score to drop or go up as long as I make my monthly payments on time?

    • Thanks for commenting. I’m pleased to hear your credit is in better shape after experiencing bankruptcy.

      In regard to credit utilization its best to keep what you use to be less than thirty percent of the credit limit and that applies to all accounts you have outstanding.

      So an account with a credit limit of $500, you would not want to exceed $150. With a cumulative limit on several cards totaling $10,000, you would not exceed $3,000 balance outstanding.

      I hope this was helpful. Best of luck.

      Patrick

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