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What Determines Your Credit Rating

Who Can See And Use Your Credit Report

What Determines Your Credit Score?

Those allowed to see your credit report include:

  • banks, credit unions and other financial institutions
  • offer you a promotion
  • offer you a credit increase

A lender or other organization may ask to check your credit or pull your report”. When they do so, they are asking to access your credit report at the credit bureau. This results in an inquiry in your credit report.

Lenders may be concerned if there are too many credit checks, or inquiries in your credit report.

It can seem like you’re:

  • urgently seeking credit
  • trying to live beyond your means

How To Check Your Credit Score

Checking your credit score helps you predict how borrowers will view your applications for credit cards or loans. If you see that your credit score is lower than you want, you have an opportunity to improve your score before you take major financial steps, such as applying for a mortgage.

Avoid sites that claim to provide a free credit score if they mention a trial subscription or ask for your credit card information. You may be charged within a few days if you don’t take some action to stop the trial.

You can check your own credit score, and you should, through any of a variety of services. There are online sites that offer free credit scores. If you have a checking account, many banks will also offer customers a chance to monitor their credit scores through their online accounts.

The Five Categories That Determine Your Credit Score

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How do credit scores work?

If youve ever used a credit card or gotten a loan for a car, you have a credit history. Most people have credit information at each of the three major credit bureaus: TransUnion, Equifax and Experian. All credit bureaus see similar, but not the same, data thats why each credit bureau may have a different score.

Your score is determined by looking at five categories:

  • Your payment history: Have you made your payments on time? In full?
  • Your current total debt
  • How long youve had credit accounts open
  • What kind of debt accounts you have: Are they all store credit cards, or is it a mix of student loans, car loans and credit cards?
  • Request for new credit: How many times have you applied for a credit card or loan?

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How Your Vantagescore Is Calculated

Your VantageScore credit score is calculated using somewhat different criteria, and VantageScore weights those criteria according to its own algorithms. VantageScore doesnt provide percentages, but rates the overall influence of each component it uses.

  • Total Credit Usage, Balance, and Available Credit are extremely influential. This includes credit utilization.
  • are highly influential.
  • Payment History is moderately influential.
  • Age of Credit History is less influential.
  • New Accounts Opened is less influential.
  • This breakdown is different from the formula used by FICO, and explains why VantageScore and FICO may generate different scores.

    Where Do Credit Scores Come From

    How Does Your Credit Score Stack Up?

    The information contained in your credit reports is the basis of your credit score. Creditors submit this information voluntarily in reports to the three major credit reporting companies: Experian, Equifax and TransUnion.

    If youd like to get a copy of your credit report know that each credit reporting company is obligated to provide you with one free credit report every year.

    Not all creditors report to all three of these companies, and they may report on different schedules. That means that your three credit reports will often be slightly different, and may be significantly different.

    • FICO, or the Fair Isaac Corporation, has been in business since 1956 and is the dominant provider of credit scores. Most lenders use FICO scores to assess creditworthiness.
    • VantageScore was initiated in 2006, a joint project of Experian, Equifax, and TransUnion. Most providers of free credit scores use VantageScore.

    Your lender is probably using a FICO score and your free credit score provider is probably using VantageScore. That means you may be looking at different scores, which could cause some confusion.

    Your credit score is not held on file and updated on a schedule. Each score is generated as a response to a request. Its a snapshot of your credit file at the time of a given request, and it can change from day to day as new information is reported.

    Also Check: Does Creditwise Affect Your Credit Score

    What Is A Credit Rating

    The term credit rating refers to a quantified assessment of a borrower’s in general terms or with respect to a particular debt or financial obligation. A credit rating can be assigned to any entity that seeks to borrow moneyan individual, a corporation, a state or provincial authority, or a sovereign government.

    Individual credit scores are calculated by on a three-digit numerical scale using a form of Fair Isaac Corporation credit scoring. Credit ratings for companies and governments are calculated by a credit rating agency such as S& P Global, Moodys, or Fitch Ratings. These rating agencies are paid by the entity seeking a credit rating for itself or one of its debt issues.

    How To Improve Your Credit Score

    The best things you can do to improve your credit score are to manage your money wisely using a realistic spending plan and to deal with your debts. Despite what some might claim, there is no quick-fix for factual but negative information on your credit report. Time and living within your means are what it takes to improve your credit rating. However, in some situations there may be a couple of things you can do to improve your score more quickly.

    Read Also: How Could A Negative Credit Report Affect Your Financial Future

    Length Of Credit History

    Responsibly managing credit accounts over a long period of time can help your credit scores. Credit scoring models may look at the age of your oldest account, newest account and the average age of all your accounts when factoring in credit history.

    There’s no shortcut to building a lengthy credit history, although becoming an on an account that the primary user has had for a long time may help. If you decide to close a credit card account in good standing, it can remain on your credit report for up to 10 years, and could continue to help your credit scores during that time. However, closing an account reduces your overall available credit, which could have a negative effect on your scores.

    The Importance Of Credit Categories Varies By Person

    Good Question: How Is Your Credit Score Determined?

    Your FICO Scores are unique, just like you. They are calculated based on the five categories referenced above, but for some people, the importance of these categories can be different. For example, scores for people who have not been using credit long will be calculated differently than those with a longer credit history.

    In addition, as the information in your credit report changes, so does the evaluation of these factors in determining your FICO Scores.

    Your credit report and FICO Scores evolve frequently. Because of this, it’s not possible to measure the exact impact of a single factor in how your FICO Score is calculated without looking at your entire report. Even the levels of importance shown in the FICO Scores chart above are for the general population and may be different for different credit profiles.

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    Diversity Of Credit 10%

    Diversity of credit shows lenders how many types of credit products you have in your credit history. The more diverse your credit history showing a variety of responsibly-used credit types like loans, credit cards and lines of credit the better. Credit diversity with payments made on time shows lenders youre responsible with all types of credit, which makes them more apt to lend to you.

    When Is Each Credit Score Used

    As mentioned earlier, lenders rely almost entirely on FICO scores, largely because they are customized to each lending sector. VantageScore is not commonly used by lenders.

    VantageScore is commonly made available to consumers. In fact, it is the mainstay of free credit score providers, particularly freestanding free credit score providers like Credit Karma and Credit Sesame.

    Since VantageScores are free to access, free credit score providers are able to offer them free of charge. Access to FICO scores requires payment of fees, so you probably wont get them for free. The exceptions are FICO scores provided by your bank or credit union. These institutions have open accounts with access to your FICO scores, and they may choose to provide them to you.

    This largely explains why consumers are often surprised when they receive different usually lower credit scores from lenders than whats reported from their free credit score sources. Though you may have a VantageScore of 720, the FICO score used by the lender may show 690.

    Read Also: What Credit Score Does Discover Use

    What Does Your Credit Limit Mean For Your Credit Score

    While having a good credit score will increase your chances of getting a higher credit limit, a higher credit limit can in turn help your credit score.

    One of the major aspects that contributes to your credit score, for example, is your credit utilization. Credit utilization is the percentage of your overall credit — across all of your open accounts — that you’re using.

    So if you have an overall credit limit of $10,000 and you have a credit card balance of $5,000, your credit utilization would be 50%.

    When it comes to your credit utilization, a good percentage to keep in mind is 30%: Your credit utilization contributes to 30% of your credit score, and staying below 30% credit utilization will have the best impact on it.

    Having a smaller line of credit can make it harder to maintain a healthy credit utilization. The higher overall credit line you have, the easier it will be to keep your credit utilization in that 30% range, and the better your credit score will be because of it.

    What To Do If The Request Is Denied

    Pin on Business Driven Dream

    Wells Fargo may deny your request for a credit limit increase for different reasons. If you don’t find out why over the phone when you call to submit your request, the bank may inform you of the reason via mail. The common reasons for rejected requests can include:

    • You have poor or average creditworthiness.
    • Your card is less than six months old.
    • You don’t use the card often enough.
    • You’ve made late payments.
    • Your outstanding balance is high.

    If you don’t find success with your initial request, you may consider asking again after at least six months. But it’s a good idea to address the concerns that caused your request to be rejected before asking again. If you need access to a higher credit limit sooner, applying for a new card might also be an option.

    Read Also: Does Applying For A Loan Affect Your Credit Rating

    How Often Is Your Credit Score Updated

    Your credit scores are always based on an analysis of one of your credit reports. Rather than being updated at specific intervals, a credit score is created when you checks your credit report. New information could be added to your credit report at any time, which means the resulting score could change.

    You may also see different scores if you’re checking credit reports from different credit bureaus, as it’s not uncommon for there to be differences between your credit reports. Or, even if you’re checking the same report at the exact same time, you could get different scores depending on which scoring model analyzes the report.

    What Are The Three Main Credit Bureaus

    The three main credit bureaus in the United States are Experian, Equifax and TransUnion. Your credit data is reported to these providers who then determine your credit score based on the FICO scoring system. Each credit bureau will produce a different credit score, as they each use a slightly different scoring system and not all three bureaus typically have the exact same data about your credit history. This often occurs when an account in your credit history has been reported to one bureau but not another.

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    How Many Credit Scores Do You Have

    While there are several different versions of the , the most commonly used version is the FICO score. Developed by FICO, formerly Fair Isaac Company, the FICO score is used by many creditors and lenders to decide whether or not to extend credit to you. According to myFICO.com, the consumer division of FICO, there are at least 10 different FICO scores used for varying purposes.

    The VantageScore, which was created by the three credit bureaus, is another common credit score. Many free credit score services offer the VantageScore 3.0.

    You Have More Credit Scores Than You Think

    What factors determine your credit score?: Nikhil Hoshing, CRIF, explains

    Most of us see our credit score as a single number. That isnt the case. Each credit score provider generates multiple scores using multiple algorithms, often tailored to the needs of specific types of lenders.

    According to myFICO, the official consumer division of FICO, there are at least 28 different versions of the basic FICO Score. But on closer inspection, that actually translates into no fewer than 84 different scores, at least numerically speaking. Thats because each of the three credit bureaus has its own version of each of the 28 FICO Scores.

    Experian
    FICO® Auto Score 9FICO® Bankcard Score 9

    As you can see from the table above, there are many FICO score versions because FICO generates specialized scores for different lending sectors. Though FICO Score 8 is the most commonly used, there are no fewer than four common FICO Scores for auto lending, five for credit cards, and three for mortgages. Each model gives greater weight to credit performance in the credit sector it specializes in.

    To complicate matters, FICO constantly updates its score versions. As you can see from the bottom section, FICO has FICO Score 9 versions specifically for auto lending, credit cards, and other lending sectors.

    Recommended Reading: Do You Need A Credit Score To Buy A House

    How Is Your Credit Score Determined

    Your credit scores are determined by credit scoring models that analyze one of your consumer credit reports and then assign a score using complex calculations.

    FICO® and VantageScore®, the two main consumer credit scoring models, look for information that indicates if someone is more likely or less likely to miss a payment. A higher score means there’s a lower chance that the person will miss a payment, which is why having a higher credit score can help you qualify for favorable rates and terms from lenders.

    Specific factors and how they’re weighted when determining your credit scores differ according to the credit model calculating them. They also vary depending on the type of credit score and which credit report from the three national credit bureaus is used when calculating the scores. Read on to find out which factors determine your credit score.

    Soft And Hard Credit Checks 10%

    A soft check occurs when you check your credit score, or when anyone else reviews your credit history for non-lending purposes. It does not negatively affect your credit score.

    A hard check, on the other hand, occurs every time you apply for a credit card or loan. Having too many hard checks in your credit history during a short period of time can negatively affect your credit score . A large number of applications for credit products can signal financial difficulty to your creditors and make them suspect you of credit shopping.

    Also Check: Is Using Your Overdraft Bad For Credit Rating

    How A Credit Score Is Calculated

    Its impossible to know exactly how much your credit score will change based on the actions you take. Credit bureaus and lenders dont share the actual formulas they use to calculate credit scores.

    Factors that may affect your credit score include:

    • how long youve had credit
    • how long each credit has been in your report
    • if you carry a balance on your credit cards
    • if you regularly miss payments
    • the amount of your outstanding debts
    • being close to, at or above your credit limit
    • the number of recent credit applications
    • the type of credit youre using
    • if your debts have been sent to a collection agency
    • any record of insolvency or bankruptcy

    Lenders set their own guidelines on the minimum credit score you need for them to lend you money.

    If you have a good credit score, you may be able to negotiate lower interest rates. However, when you order your credit score, it may be different from the score produced for a lender. This is because a lender may give more weight to certain information when calculating your credit score.

    The Ultimate Guide To Credit Scores In Canada

    Credit Score Determining Factors

    What is a credit score? A credit score is a 3-digit number that allows lenders to determine a potential borrowers credit riskthe risk they run of not paying back their credit cards or loans. Canadians typically cannot borrow money or receive credit of any kind unless they have a solid credit score. Canadas two national credit bureaus, Equifax and TransUnion, create credit scores and credit reports based on the information they receive about each borrower from their lenders.

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