Credit scoring is used to calculate the probability that credit users will pay back their loans. The scores are known as FICO scores because they were developed by Fair, Isaac & Company. People with higher credit scores have a higher probability of paying back all that they owe. The scores range from 0 to 900. A score of 650 or above is generally considered a good score and is eligible for most credit offers at the best interest rates. But because all lenders use their own guidelines for determining whether to give a loan, there is no set cutoff defining what is an acceptable credit risk.
Besides the information listed below, credit scores also take into account some non-financial information, such as length of time at current address and employment history.
Factors in how your credit score is calculated
Your credit score is calculated by a formula whose exact details are a trade secret. However, all but the most specific details are public knowledge.
Five factors influence the score and are weighted according to the following percentages:
Payment History 35%
Amount Owed 30%
Length of Credit 15%
Pursuit of New Credit 10%
Types of Credit Experience 10%
This is the factor most likely to be lowered by choosing debt settlement.
Payment history is a record of whether payments have been late or missed on any credit accounts. They take into account:
A few late payments a few years ago carry far less weight than currently outstanding unpaid debts.
It also contains a record of whether there have been any:
These are all strongly negative, but more recent marks are worse than older ones.
This is the factor most likely to be immediately helped by debt settlement.
It is best not to have more than three credit card accounts, and to have more credit available than you are using. Amount owed on a house or car is weighted differently than on a credit card, but it all affects this part of the score.
Length of Credit
The bureau considers:
In general, the longer you use credit, the better your score.
Pursuit of New Credit
Attempting to get new credit can hurt this portion of your score. This is determined by counting the number of credit inquiries (requests for a credit report, or credit checks). However, certain types of inquiries shouldn’t affect this score. These include
Inquiries made recently have a more negative impact.
Types of Credit Experience
Having a mix of different kinds of loans (credit card, department store accounts, car loan, mortgage) can help this portion of the score. However, opening new accounts just to increase this portion of the score will cause other areas to decrease. Therefore, doing so is not a good idea.
Reasons for Scores
When potential lenders receive your credit report, they also receive a list of the top four reasons the score isn’t higher. A list of the possible reasons appears below.
Account payment history too new to rate.
Too many recent inquiries in the last 12 months.
Disclaimer: Debt Shield, Inc. does not provide legal, tax or investment advice. Debt Shield, Inc. does not assist in the repair, modification, improvement, extension or correction of credit entries or reporting.
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