How Credit Scoring Works
Understanding your credit score also means understanding how credit scoring works. You may feel a little overwhelmed when you first look at your credit report, but actually when you start breaking things down you will be able to understand the process quite easily. If you have a better understanding of credit scoring and how credit scoring works, you can do a better job of learning how to manage your credit report for better scores. When you have better scores, you will better be able to apply for credit, get good interest rates, and secure the loans that you need.
There are actually three steps to credit scoring. By learning those three steps, you will be well on your way to clearing any negative marks that already exist and then avoiding any negative marks in the future.
Items Get Reported
The first step to credit scoring will be actually be building credit. When you open a credit account, whether it be a credit card, a loan, or store credit, then this will get reported to your credit reports. There are three different credit reporting agencies: TransUnion, Experian, and Equifax. Some companies report to all three of the agencies, while others only report to one or two of them. This report will show up on your credit report as an open account. When someone views the report, they will see the open account along with the amount that you owe to the particular creditor.
As far as credit scoring, there is a fine balance here. Having some open accounts with a small amount of money owed will actually raise your credit score. This is because you are proving that you are responsible enough to manage bills and pay them in a responsible manner. However, too many open accounts will actually lower your score, even if you do not owe any money on them. This is because you will appear to be a risk. If you owe a great deal of money to the accounts, then it will appear you cannot pay the bills. If you owe very little but have numerous accounts, then you will also be a risk. You could easily charge up those accounts and get in over your head. It is vital that you keep a balance between enough accounts and too many accounts.
Late Bills Bring the Score Down
When you make payments more than thirty days late, then the company that you owe can report these to your credit agencies. This can include any type of bill, not just those lenders with which you have open accounts. For example, if you have a medical bill and you let it go thirty to ninety days without being paid, then this could be reported. If you do not pay the bills at all, then they will be reported as delinquent. As more and more late payments build up, this will continue to lower your credit score. These late payments will stay on your credit records for three years, so they can be bad for your score for quite some time.
If you file for bankruptcy, this will have a detrimental effect on your credit score and this bankruptcy will be on your credit report for 7 years before it disappears.
Other Things that Will Affect Credit Scoring
Finally, there are a few other things that will have to do with how credit scoring works. When someone checks your credit report, this too gets reported. There are many different people or companies that will check your report. Here are a few of the ones that will:
- Potential lenders
- Credit card companies
- Potential employers
- Utilities companies
- Auto lenders
- Insurance companies
Each time that your credit is checked by anyone but you, then it will make a mark on your credit score. If these add up in a given amount of time, this will start to lower your credit score. This is because of two reasons: several people checking your credit either means you have been denied over and over again or you are opening a great deal of credit accounts in a short amount of time. Either option can appear to pose as a risk. If someone wants to check your credit, only allow them to do so if it is absolutely necessary.
Once you learn how credit scoring works, you will find it much easier to avoid doing anything that could be negative for your credit report. In addition, it will give you the information and tools that you need in order to start working on improving your credit score.