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Credit Score, What in the World is it really?
We created this page, “Credit Score, What in the World is it really?” in attempt to demystify the “Credit Score”. You can search all over the internet for ways to help build or rebuild your credit. You’ll find exponentially more places that want to help you to use your credit. There’s even people who will tell you that without a high credit score you’ll never accomplish anything in life. So, what in the world is it really?
Credit Score, What in the World is it really?
For starters if you’re looking to check your credit score, improve your credit score or apply for a line of credit this page isn’t going to help you. However, you can contact our World Class Internet Department now at (800) 680-0835 if you’re looking to get approved to purchase a vehicle as they’re experts at handling all credit situations. We also have several articles on how to build or rebuild your credit score. Now that that’s out of the way, let’s address what your credit score is.
As far as definition goes you can think of the Credit Score as a “numerical expression to represent the creditworthiness of a person”. This is also the “likelihood that someone will pay their bills”. It is important to note that income is not considered by the major credit bureaus. The three major credit bureaus in the US are Experian, Equifax and TransUnion. These three bureaus keep a “credit report” on each person. These reports are used by the bureaus themselves as well as other companies with different calculations or algorithms that generate a score. The most widely known type of credit score is the FICO score. It has been and is still widely used by many mortgage lenders that use a risk-based system. These systems are used to determine the possibility that a borrower may default on the financial obligation to the lender or institution. It is widely recognized and even criticized that the FICO score is a measure of past ability to pay. As such, there are several other scores that are calculated, some of which use the FICO as well, to determine the likelihood that a lender will receive their payments. Equifax has their own Equifax Credit Score as well as their ScorePower (which is the FICO score from Equifax). Experian has their PLUS score. Each of the three major credit bureaus also sell the VantageScore credit score. Most major credit card issuers and large lenders have their own proprietary score methods as well. Other companies have developed new credit scores in that past years that do not use the credit data from the large bureaus to predict creditworthiness which we will briefly discuss later.
Credit history has several uses outside of direct lending to a consumer. Credit history has been used at an increasing rate over that past few years to help employers screen their applicants. However, the actual credit scores are not included for employment screening purposes. Credit history is also used by landlords to determine the likelihood a tenant will make their payments. Some government departments also use credit history. Mobile phone companies and insurance companies also take credit history and even credit scores in to consideration.
Lots of studies have been done regarding credit scores. They have shown that scores do tend to be predictive of the risk for both insurance and credit purposes. Employment screenings that utilize credit history were calculated to be about 19% in 1996 (Wernau, Julie (2010-04-28). “TransUnion battling attempts to ban employment credit checks”. Chicago Tribune. Retrieved 23 October 2011.). A decade later they were up to 42%. Also, if you’re wondering what the typical range for credit scores is, the classic FICO score ranges between 300 (where you don’t want to be) an 850. The median score in the US was 723 in 2006. Five years later it dropped to 711.
To wrap this up we’ll share a few other things you should or might want to know.
- Interpretation of credit scores varies based on several factors such as the strength of the economy but a score of 640 has usually been the divider between “prime” and “subprime” lending.
- U.S. Citizens are entitled to an annual free credit report from each of the three credit bureaus. These reports however do not come with a score and cost money to purchase. You can get your credit report at the website run by all three of the major credit bureaus: annualcreditreport.com . The fee to purchase your credit score is regulated by the Federal Trade Commission (FTC) and is usually $7.95.
- If you dispute an item on your free annual credit report the bureaus have 45 days to investigate under the Fair Credit Reporting Act. If you paid for your credit report and dispute and item the bureaus have 30 days to investigate.
- As a general rule the more one uses their available credit and borrows more money ones credit score decreases.
- Wall Street reform bill, passed on July 22, 2010
- A consumer is entitled to receive a free credit score if they are denied a loan or insurance due to their credit score.
- Fair Credit Reporting Act
- A consumer is entitled to a free credit report within 60 days of any adverse action taken as a result of their credit score. This does not include the credit score. Adverse actions include but are not limited to receiving substandard or “subprime” credit terms from a lender or being denied credit.
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