How Credit Scores are Calculated

By Loubelle Bernaldo
When you apply for a loan or credit card, the lender's approval will largely depend on your credit score. While your income, job security and assets indicate your ability to repay the loan, your credit score is an indicator of your attitude and reliability about repaying debt. The higher your credit score, the more likely you are to be approved for your loan.

So, how are these credit scores calculated?

There are three major credit bureaus, also known as Credit Reporting Agencies (CRA's), those being Experian, Equifax and Trans Union.

These three companies receive information from most of your creditors, especially credit card companies and long-term loans like mortgages and auto loans. Utilities are usually not included because if you do not pay, they simply disconnect your service.

Each credit bureau has a similar method to calculate your credit score. They use a point system to evaluate many different factors, such as

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number of credit cards and current balance on each (considered as debt)
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number and amount of other outstanding debts, such as mortgage, educational loans, car loans, etc.
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payment record for each debt, including late payments, outstanding balances on credit cards, length of time of outstanding balances, missed payments, payments turned over to credit collection agencies, credit counseling intervention, bankrupcy, etc.
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for each negative factor, points are deducted from a perfect score of 850. Nobody has a perfect score, since we all have some form of current debt, even if we have never made a late payment.
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students or new arrivals to the US may have little to no credit established, resulting in low credit scores.

When you apply for a loan, the lender will get your credit scores from all three agencies. They will be similar, but not exactly the same. They calculate the average of the three scores and that is the number they use to assess your credit risk.

It is easy to see that the lower your debt, and the better your payment patterns, the higher will be your credit score.

See our article in the Reference Library entitled, "Protect Your Credit" to see how you can get your own credit scores. See related articles on how to correct errors on your credit report and learn your rights under the law of the Fair Credit Reporting Act.

http://www.parkavecredit.com

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