Credit scoring takes the information on your credit
report and compares it to similar people with the same general characteristics.
It takes a great deal of data and runs a risk assessment which tells it how
likely it is that you will be able to make all of your credit payments as well
as how much you can handle. For example, imagine two people owe the exact same
amount in loans. One individual, however, owes 6 different lending agencies
smaller sums of money that totals that amount, while another individual has one
giant loan. The data suggests that the individual with several smaller loans
poses a greater credit risk and his or her credit score will be negatively
In addition, things like past payment history and total amount owed also
affects your credit score. All of these are taken into account in one giant
algorithm for creditors to look at.
Credit Scoring Models
All credit scoring
models provide weighted values to different aspects of your credit. For
example, your ability to pay back your loans on time is more important than
owing less money, so it is factored into your credit score most positively.
All of these predictors are based off of the data from previous borrowers,
and since these credit scoring companies have access to information on the
credit history of the majority of the western world, the data they use to
calculate these scores is not small.
What Score Do I Want?
Ideally, you will have a credit score over
700. 700+ implies that you are good at paying back your lenders on time, you
do not owe a great deal of money to any lender, and you do not have a large
number of credit sources that you need to keep track of. The closer you are
to 850 the better, but very few lenders expect you to have a credit score
near the mid 800's. You at least want a credit score of 700, though 750
is more preferable.
What Affects Credit Scoring?
Again, credit scoring agencies have
their own secret algorithm for calculating your
credit score. But you can bet that the following factors increase how your
credit score is produced:
1) Your overall payment history (how often
you made payments on time and whether or not you paid the full amount or
more than the full amount).
2) How much you owe overall
long you have had credit - this is not necessarily related to your age. If
you have had credit since you were 18 and you are not 25, your credit score
is likely to be the same as if you had credit since you were 25 and are now
32 - though there may be other age related factors involved, like
4) CCJ's, Bankruptcy, Insolvency or any other significant
red marks in your credit.
5) Percentage of credit used as well as
percentage of credit available.
All of this information will affect
whether or not you are a good candidate for a loan and how high your
interest rate is.
Credit scoring is meant to be your friend and not your
enemy, but it can seem like it is out to get you. Just remember that all
credit scoring is a numerical depiction of risk. If you do not do any of the
behaviors that allow credit agencies to believe that providing you money is
a risk, you are likely to have a higher credit score.