What is Credit Scoring?
It can be a little confusing when you first look at your credit report. You may not understand why you have the score that you do, or you may wonder what affects your credit score for the good or the bad. In fact, credit reporting and scoring is an intricate, yet extremely important process. You need to know what credit scoring is and how it works. If you know these things, then you will be better prepared to work on your report so that your score can be higher.
When you have a higher credit score, then you will be able to get credit more easily. In addition to being able to get approved, you will also be able to secure much lower interest rates. Adversely, if you have a lower credit score, you will receive much higher interest rates and that will cost you a great deal of money. If your credit score is in bad enough shape, then you may not be able to get financing at all. Here is the answer to your question: what is credit scoring?
The Basics of Credit Scoring
First, let’s talk about the basics. There are several things that go into your credit score, but we can break them down into three categories. These categories include the following: open accounts, delinquent accounts, and credit report checks. Here is a little more information on the three.
- Open accounts will include anyone with whom you currently have credit, even if your balance with them is zero. These open accounts can include credit cards, store credit, auto loans, mortgages, home equity loans, and personal loans.
- Delinquent accounts will include any accounts that you left unpaid for more than 30 days. These accounts will stay on your credit report for three years. Delinquent accounts, however, will include much more than just the lines of credit mentioned above. They can include almost any type of bill that you left unpaid, like medical bills and utilities.
- Credit report checks will include any time that your credit is checked by potential lenders, potential employers, possible landlords, or utilities companies. Each time your credit is checked, it will show up on your report. However, it will not show up if you check your own credit, so do not worry about checking your credit at any time.
What Will Make Credit Scores Go Down?
Of course, understanding what will affect your credit score for the negative is important to know. The only way that you can get your credit score up will be to understand the things causing it problems and then repairing them. Here are a few facts that you need to know.
As mentioned, when you have accounts that you have allowed to go past due, then they will definitely have a negative impact on your report. Each time you let an account go more than thirty days past due, then they could be reported on your credit score, and then they will stay on your account for three years. This can include any unpaid bill, no matter how large or small it may be.
If you have very many open accounts, this will appear as a risk. When potential lenders see that you have the ability to charge large amounts of credit, they will wonder if you will actually be able to pay them. If you have open accounts with zero balances, they will still affect your credit so it would be a good idea to close them.
In addition to having too many open accounts, having too many accounts with high balances will be just as bad. It will appear that you are not responsible enough to pay these accounts and this will cause your credit score to go down.
There are other things that will affect your credit score for the negative too. These will include bankruptcy, which will stay on your account for 7 years and will have a very big negative impact. In addition, if you allow your credit to be checked too many times, this will cause your score to go down too. That is because it will appear as if you are applying for a great deal of credit at a large number of places.
The Bottom Line
If you want to get a hold of your finances and your credit, then you need to understand credit scoring. There are quite a few things that can negatively affect your score, but if you know what they are, you can work on them. Keep in mind that there are three different credit reporting agencies: Experian, TransUnion, and Equifax. They all work in the same manner as far as credit scoring.