|Credit Scores and Credit Ratings
Intelligent Credit Management
Establishing, or Re-Establishing a Credit History
Personal Financial Management Page
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Credit Scores and Credit Ratings, Intelligent Credit Management, Establishing or Re-establishing a Credit History
In the United States and Canada, like nowhere else, establishing a credit history for the first time, or re-establishing after some poor personal credit management, is a difficult process. The problem comes that you need a history before you can get credit but cannot establish a history without getting credit. It is a classical "Catch-22" situation!
Loan, mortgage companies and other financial institutions pay professional credit bureaus to compile information about individual consumers. The reports are like a sort of high school report cards on the person or a company, where credit bureaus rate a persons behavior in the financial world by collecting individual credit and payment information.
What are the components of the Credit Score?
The Credit Scores
The scores classify individuals into certain categories which are then evaluated by lenders and now, commonly also by employers, on the basis shown below.
There are several relevant credit monitoring agencies in the USA and they will assess you differently. The three main credit monitoring agencies are Equinox, Experian and TransUnion. There are two more, Innovis and PRBC, but they are of minor importance.
All credit agencies use FICO scores as the basis of their evaluation. The three main ones include additional measures, sometimes between 10 and 20 different characteristics, giving them different weights within the total calculation. As a consequence, you will have differing scores from the three main agencies.The differences will not be large, but 20 or 40 points can make quite a difference, to the way a lender views your credit worthiness.
The Parts of the FICO Credit Score Components and their Weight within the Total Score
Strangely enough, the amount or level of income the person has does not play any part in the credit score. The argument of the credit score compilers is that quantity alone, does not guarantee good credit behavior or even lower risk to a potential lender.
However, in a loan evaluation, the amount of your income does play a part. Your income will be related to the total amount of your debt and to your outgoings in servicing this debt. It is just that for the calculation resulting in your credit score, income is not seen as important.
You can get a free credit score once a year from all three credit reporting agencies under the Fair Credit Reporting Act, from http://www.annualcreditreport.com .
Once you have the credit report, examine it for accounts that are noted as delinquent, if you have any such accounts. Also, check out how many of your accounts show late payments. Both types of incidences will lower your credit score.
The rules under which these credit bureaus work are governed by the Federal Trade Commission. The following public document will give some insight:
How Valid is the Credit Scoring System?
With credit scoring systems, creditors are able to evaluate millions of applicants consistently and impartially on the basis of different characteristics. But credit scoring systems must be based on large enough numbers of recent accounts to make them statistically valid.
Although you may think that such a system is arbitrary or impersonal, a properly developed credit market using a credit scoring system can make decisions faster and more accurately than an non systematic individual approach can. And some lenders, especially if they have experience with you, design their systems so that marginal cases -- not high enough to pass easily or low enough to fail definitively -- are referred to a credit manager who personally decides whether the company will extend credit to that consumer. This may allow for discussion and negotiation between the loan manager and the potential borrower.
What Happens If You Are Denied Credit?
While a creditor is not required to tell you the factors and points used in its scoring system, the creditor must tell you why you were rejected for credit. This is required under the Equal Credit Opportunity Act (ECOA).
So if, for example, a creditor says you were denied credit because you have not worked at your current job long enough, you might want to reapply after you have been at that job longer. Or, if you were denied credit because your debt-free monthly-income was not high enough, you might want to pay some of your bills and reapply. Remember, also, that credit scoring systems differ from creditor to creditor, so you might get credit if you applied for it elsewhere.
Sometimes you can be denied credit because of a bad credit report. If so, the Fair Credit Reporting Act requires the creditor to give you the name and address of the credit reporting bureau that reported the information. You might want to contact that credit bureau to find out what your credit report said. This information is free if you request it within 30 days of being turned down for credit. Remember that the credit bureau can tell you what is in your report, but only the creditor can tell you, why it denied your application. If you are denied credit, you still have some alternatives.
One possibility is to find another lender who might be willing to take a risk with you, but at a price. So you have to carefully weigh, how far you want to go with that.
Another option is to have someone, a relative for instance, who has a good credit history established co-sign. If you are lucky enough to know such a person, you are on your way to establishing credit. But you have to realize the responsibility you take on and that any default of credit on your part affects the credit history and credit score of the co-signer. Therefore, you have to evaluate your own credit risk carefully. Someone who cares about you to co-sign, certainly does not deserve a bad credit record through no fault of their own.
Once the co-signing has been done, you make payments on or before the due date. Over time, you will have established a credit history. If you want to accelerate the issue, payoff the debt in full when the first bill arrives but not before. Completion of the full billing cycle is important for a "pays on time" report card to be established.
You might have to repeat this until you no longer need the co-signor. A good credit history is now again established.
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