What is a credit score?
A credit score is a numerical rating that attempts to measure a
borrower’s creditworthiness. The score indicates the borrower’s general payment
behaviors—summarizing how often the person pays their bills and obligations on
time. A high credit score does not guarantee that a loan applicant will never
default on a mortgage; however, that person represents a statistically smaller
risk to a lender than a person with a low score. Lenders and creditors,
therefore, are more likely to approve loans and offer their most-favorable
terms to people with the highest scores.
Credit
scores have been used for more than three decades by lenders and creditors as
an objective way to decide whether to offer consumers credit cards, home loans
and car loans.
The
score is based on the data that a person has on record at the Credit Reporting
Agency (Bureau).It is common for an
individual’s score to differ slightly from one Bureau to another. That’s
because the score is developed only from the credit information on file at each
particular bureau, and information may vary from one Bureau to the next.The
Bureaus can only report the data that is sent to them from the lenders,
creditors and companies that report such data to them.
Scores
are determined by weighing several factors in a person’s credit record,
including payment history, balances, number and types of credit accounts. By
using a formula, results can be more objective than humans relying on different
criteria to create a measurement. Credit scores do not consider a borrower’s
race, gender, religion, age, income, marital status, or national origin. But
mathematical formulas have limitations. For example, a person who has always
paid cash for purchases will score low due to a lack of credit history. Many
lenders, therefore, do not rely exclusively on a credit score and will take
other factors into account that may mitigate a poor credit score.
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What factors go into the credit-score formula?
A score is derived in part from a consumer’s payment history. That
is, do you pay credit cards, mortgage, and car-loan payments on time, and is
your history free from ‘past-due’ amounts, bankruptcies, foreclosures, wage
attachments, liens, etc.? As you might imagine, the more recent and larger a
negative item, the farther it drags your score down. Also, the more instances
you have of a problem, the lower goes your score.
Amounts
owed by a person also factor into part of your score. The total amount owed,
whether you are close to the maximum amount on credit cards, how many accounts
you have, and what balances remain on installment loans all come into play in
this area. The larger the debt you have on a card and the closer that amount is
to your card limit, the more likely it is that your score will drop.Managing
your debt is important.Making your
payments on time and restricting your purchases to live within your financial
means is also important.The lower amount
of credit card debt you have the better off you are.Remember
that in many cases, a small balance on a credit card with on-time payments may
be better than carrying no balance.
Another
part of your score comes from the length of your credit history, including how
long specific accounts have been established and the length of time since you
used specific accounts. Another part of your score is determined by how many
new accounts and requests for credit you have. Remember, a score is just one
important indicator of your creditworthiness.Other
key factors include your assets, your liquidity and your monthly expenditures.
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What is a good score?
Generally, the higher the score the better.Credit
scores range from 350-850. The lower the person’s score, the higher the credit
risk (or bill paying risk) they are assigned. The answer to “what is a good
score?” is: “It depends.”While no
industry standard exists for making decisions based on scores, and most
creditors and lenders would be wise to evaluate other factors including a
person’s score, most companies would look favorably on a score in the 700s or
above.
Yet, for some
situations, a score of 630 would be considered good, given other financial
strength factors are also good.In
general, a lower credit score will cause a person’s cost of living to increase.Low
scores, in the 500’s and lower, can cause insurance costs to increase and cause
utility costs to be higher.So,
bottom-line, monitor your score, and make bill payments on time to improve your
score.
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Who calculates credit scores?
When
a lender or a credit grantor requests your score, it is calculated by a
computer at the lender's location, by a third-party service provider such as a
mortgage reporting agency, or may be applied at a consumer reporting agency.
The score is one of many pieces of information the lender and creditor may use
in evaluating your credit application. Community Empower uses a sophisticated
method to calculate your score to most closely match your true mid-score.The
mid score is the ‘middle’ score of the three reports a lender will often
retrieve when you apply for a home loan.
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How often do credit scores change?
Your
credit score is a fluid number that changes as your credit report changes.
Therefore, any change to your credit report due to a reported financial
transaction could impact your score, almost on a daily basis for some people.
When you enroll in Community Empower for a period of longer than 1 month, you
will get a new analysis and score calculation once every 30 days.
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Will I be penalized for shopping around for the best
interest rate?
Credit
scores count every consumer-initiated credit application. Therefore,
excessive applications for credit can adversely affect a score.
However, it is slowly becoming more common for risk score models
to recognize when a consumer is shopping for the best rates and
either ignore inquiries for a specific purpose within a period
of time, or count multiple inquiries for a specific purpose as
only one. This is most common in mortgage and auto lending. In
such cases, shopping around may have little or no impact on a
person’s credit score. Tip: Your best choice
is to use Community Empower to qualify you for a loan. When you
enroll, the system will automatically alert you when you have
become pre-qualified for a loan - without harming your score.
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Why is my Community Empower credit
score different than the score reported by my lender or other
credit reporting companies?
There
are many different credit score models. The model used to calculate the score
you obtain, and the score itself, may be different than the one the lender uses
in making its decision. For instance, you may get a generic credit risk score
from a Bureau, but an auto lender might use its own custom-scoring model with a
different scale, so the numbers won't be the same but will likely represent a
similar level of risk. Community Empower uses a sophisticated method to
calculate your score to most closely match your true mid-score, as used by most
mortgage lenders.
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What
if I don't I have a credit score?
Credit
scoring models cannot generate a score unless there is sufficient
credit information. If you have little or no credit history, you
will probably not have a credit score available. If you have never
had a credit account, try applying for a retail, gas or secured
credit card to begin your credit history. Some banks offer a secured
debit card or “check card” with their checking accounts that can
migrate to a credit card with 6 months of current payment usage.
If you keep your outstanding debt low and pay your bills on time,
before long you'll receive additional offers for credit. However,
you may want to be cautious and only apply for credit that you
really need.
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Does
having too many credit cards affect a credit score?
There
is no magic number of cards.
It depends on the ‘amount owed’ balance a person carries on each
of the credit cards. Having too many credit cards with either high balances or large amounts
of credit available can negatively impact risk scores depending
on the person’s overall credit history.
Alternatively, having several cards with a modest balance and
a good ‘paid-on-time’ history will always improve a person’s credit
score.
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Do
late payments affect a credit score?
Absolutely.Paying
bills on time is generally the single most important contributor to a good
credit score. Being late on any bill, for any length of time, is a possible
indication of future non-payment of debt and is almost always viewed negatively
by lenders. Any late payments will remain on your credit report for up to seven
years.
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Does
every inquiry (or credit file request) affect a credit score?
Credit
scores only consider inquiries initiated by the consumer. These include
mortgage applications, credit card applications and auto loan applications.
Inquiries that don't affect scores include: requests by you to the consumer
reporting agency for your personal report, lenders using credit information for
account review purposes rather than credit granting or application purposes,
lenders using credit information for "pre-approved" credit offers, or
inquiries for use in making employment decisions. Inquiries that don't impact
risk scores are called a “soft pull.”The
mortgage, credit card and auto loan application and credit granting inquiries
are known as “hard pulls.”Community
Empower uses the “soft-pull” method so that your credit score is not affected
by our service.
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