Bad Credit Resource Center

The more you understand about any subject, the more interesting it becomes. As you read this post you’ll find that the subject of credit score is certainly no exception.

Truthfully, the only difference between you and credit score experts is time. If you’ll invest a little more time in reading, you’ll be that much closer to expert status when it comes to your credit score.

Before you start boosting your credit score, you need to know the basics.  You need to know what a credit score is, how it’s developed, and why it plays an important role in your everyday life. 

Most lenders certainly know what kind of information they can get from a credit score, but knowing this information yourself can help you better see how your everyday financial decisions impact the financial picture lenders get of you through your credit score.  A few simple tips are all you need to know to understand the basic principles:

Tip #1: Understand where your credit scores come from.

If you’re going to improve your credit score, then you must understand what your credit score is and how it works.  Without this information, you won’t be able to very effectively improve your score because you won’t understand how the things you do in your daily life affect your score. 

If you don’t understand how your credit score works, you’ll also be at the mercy of any company that tries to tell you how you can improve your score - on their terms and at their price.

Generally, your credit score is a number that lets lenders know how much of a credit risk you are.  Your credit score is a number, usually between 300 and 850, that lets lenders know how much debt you are carrying and how well you are paying them off. 

The higher your credit score, the better credit risk you make and the more likely you will receive credit at great rates.  Scores in the low 600’s and below will often give you trouble in finding credit, while scores of 720 and above will generally give you the best interest rates.  However, credit scores are a lot like GPA’s or SAT scores from college days - while they give others a quick snapshot of how you are doing, they are interpreted by people in different ways.  Also, some lenders put more emphasis on credit scores than others. 

Some lenders will work with you if you have credit scores in the 600’s, while others offer their best rates only to those creditors with very high scores indeed. Some lenders will look at your entire credit report while others will accept or reject your loan application based solely on your credit score.

Your credit score is based on your credit report, which contains a history of your past debts and repayments. Credit bureaus use computers and mathematical calculations to arrive at a credit score from the information contained in your credit report. 

Each credit bureau uses different methods to measure this (which is why you will have different scores with different companies) but most credit bureaus use the FICO system. FICO is an acronym for the credit score calculating software system offered by Fair Isaac Corporation company.  This is by far the most used software since the Fair Isaac Corporation developed the credit score model used by many in the financial industry.

In fact, credit scores are sometimes called FICO scores or FICO ratings, although it is important to understand that your score may be tabulated using different software.

One other thing you may want to understand about the software and mathematics that goes into your credit score is the fact that the math used by the software is based on research and comparative mathematics.  This is an important and simple concept that can help you understand how to boost your credit score.  Simply, what this means is that your credit score is in a way calculated on the same principles as your insurance premiums. 

Your insurance company likely asks you questions about your health, your lifestyle choices (such as whether you’re a smoker) because these bits of information can tell the insurance company how much of a risk you are and how likely you are to make large claims later on.  This is based on research. 

Similarly, credit bureaus and lenders often look at general patterns.  For example, since people with too much debt tend not to have great rates of repayment, your credit score may suffer if you’re carrying a large debt load. Understanding this can help you in two ways:

1) It will let you see that your credit score is not a personal reflection of how “good” or “bad” YOU are with money.  Rather, it is a reflection of how well lenders and companies think you will repay your bills… based on information gathered from studying other people.

2) It will let you see that if you want to improve your credit score, you need to work on becoming the sort of debtor that studies have shown tends to repay their bills.  You don’t have to work hard to reinvent yourself financially and you don’t have to start making much more money.  You just need to be a reliable borrower.  This realization alone should help make credit repair far less stressful!  

Credit reports are put together by credit bureaus, which obtain information from client companies. It works like this: credit bureaus have clients - such as credit card companies and utility companies, to name just two - who provide them with information. 

Once a file is opened on you (i.e. once you open a bank account or have bills to pay) then information about you is stored on the record.  If you’re late paying a bill, the clients call the credit bureaus and note this.  Any unpaid bills, overdue bills or other problems with credit count as “dings” on your credit report and affect your overall score. 

Information such as what type of debt you have, how much debt you have, how regularly you pay your bills on time, and your credit accounts are all information that is used to calculate your credit score. 

Your age, sex, and income don’t count towards your credit score.  The actual formula used by credit bureaus to calculate credit scores is a well-kept secret, but it’s known that recent account activity, debts, length of credit, unpaid accounts, and types of credit are among the things that count the most in tabulating credit scores from a credit report.

Knowing enough about your credit score to make solid, informed choices cuts down on the fear factor. If you apply what you’ve just learned about credit scores, you should have nothing to worry about.

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