Credit scoring systems are used to estimate the value of your credit and access the risk level you are to a lender. Credit monitoring companies collect information about your credit activity as it comes in from your creditors. The credit use you have is taken into consideration and a highly complex scoring system is used to take your basic information and turn it into a number. This number is in use by lenders and others when they make decisions about lending to you, hiring you, providing you with insurance or considering the interest rate charged to you.
Credit Bureau Scoring Systems
Over time, there have been several scoring systems used by credit bureaus to analyze and report on the personal credit history of individuals. The most well-known is Fair Isaac (FICO). With this scoring system, all three of the major credit bureaus, TransUnion, Experian, and Equifax, use their own tools to determine the numerical number of a personal credit history. FICO has been phased out from use by these agencies, though it is still heavily used in the mortgage industry. Banks can use FICO to determine if they should lend, but most unsecured lenders no longer use this scoring system.
The current system used by unsecured lenders is called VantageScore. The use of this system has helped to make credit reporting more consistent and easy to understand. It uses a wider range of information and bases credit decisions off of millions of credit files to determine the score of an individual. With credit scoring, the amount of risk assigned has a basis on the way credit is in use by many people of the same or similar histories.
FICO scores range from 300 to 850, with higher scores being better. Most Americans have a rating between 650 to 700. With VantageScore, scoring is based on a scale of 501 to 990, with each bracket of numbers being assigned a letter grade, with lower grades being more risk.
- 901 to 990: "A" Grade
- 801 to 900: "B" Grade
- 701 to 800: "C" Grade
- 601 to 700: "D" Grade
- 501 to 600: "F" Grade
It is up to the lender to determine which type of scoring system they will use when rating your credit history.
Factors in Credit Scoring Systems to Consider
Credit scoring is a complex algorithm designed to be quite complex to help ward off individuals who would otherwise take advantage of that knowledge. Yet, there are things you can do to improve your credit score no matter what credit scoring system is used. These actions can make it easier to secure the loan you want:
- Know your score: Be sure to request a copy of your credit report, available through each of the three credit reporting agencies, at least one time per year. Check it for errors and ask the agencies to remove these as soon as possible. In either credit scoring system used, the data collected by these agencies helps to formulate your score.
- Make payments on time: Making monthly payments on all of your loans, utilities, and medical bills on time can greatly improve a credit score, especially when it is done consistently over time. In some reports, being late just one time can slash into your credit score considerably. It will remain on your credit report for up to two years.
- Keep your debt to income ratio low: The amount of debt you have in comparison to the amount of income you have, is an important indicator of how dependent you are on credit. Lenders want to see this number as low as possible prior to approving you for a loan.
- Use credit: In order to have a good credit history, you still have to use credit on a regular basis. Use it wisely, paying off your balance in full each month whenever possible. It takes time to build a credit history.
- Don't apply for too much credit: Applying for too many credit cards at one time can show that you might be desperate for credit. The credit reporting agencies keep track of these on your report and call them "inquiries." They will stay there for two years.
Taking care of your credit history will insure that when credit scoring systems are used on your histoy, you look good to lenders. You can ask your lender what type of scoring system they use, as well as what credit score they would like you to have to qualify for a loan through them.