Notes

Unit 4 Lesson 2
Credit bureaus gather information about your spending and payment habits as they relate to credit use. They collect as much information as possible from as many consumer financial transactions or inquiries as possible. They, they sell this information to any legally recognized organization (and example is a bank or credit company) who as a legal purpose for accessing the information.

Credit Scoring - A system used by creditors to help determine whether to give you credit.
•Credit Report – Information kept by a credit bureau about your past and present loans, payments and credit limits.
•Credit Bureau- Also known as a credit-reporting agency, a business that keeps a record of your credit history.

Credit Score
300 to 850
Percentage
499 and below 1 percent
500-549 5 percent
550-599 7 percent
600-649 11 percent
650-699 16 percent
700-749 20 percent
749-799 29 percent
800 and above 11 percent

Key factors of your score
There are over 20 factors in five categories that make up a credit score. Let’s look at how these categories in depth.

35% - How you pay your bills
The most important factor is how you've paid your bills in the past, placing the most emphasis on recent activity. Paying all your bills on time is good. Paying them late on a consistent basis is bad. Having accounts that were sent to collections is worse. Declaring bankruptcy is worst.

30% - Amount of money you owe and the amount of available credit
The second most important area is your outstanding debt -- how much money you owe on credit cards, car loans, mortgages, home equity lines, etc. Also considered is the total amount of credit you have available. If you have 10 credit cards that each have $10,000 credit limits, that's $100,000 of available credit. Statistically, people who have a lot of credit available tend to use it, which makes them a less attractive credit risk.

"Carrying a lot of debt doesn't necessarily mean you'll have a lower score," Watts says. "It doesn't hurt as much as carrying close to the maximum. People who consistently max out their balances are perceived as riskier. People who never use their credit don't have a track history. People with the highest scores use credit sparingly and keep their balances low."

15% - Length of credit history
The third factor is the length of your credit history. The longer you've had credit -- particularly if it's with the same credit issuers -- the more points you get.

10% - Mix of credit
The best scores will have a mix of both revolving credit, such as credit cards, and installment credit, such as mortgages and car loans. "Statistically, consumers with a richer variety of experiences are better credit risks," Watts says. "They know how to handle money."

10% - New credit applications
The final category is your interest in new credit -- how many credit applications you're filling out. The model compensates for people who are rate shopping for the best mortgage or car loan rates. “The only time shopping really hurts your score,” Watts says, “is when you have previous recent credit stumbles, such as late payments or bills sent to collections.”

"Then, looking for new credit will be seen as an alarm because statistically, before people declare bankruptcy and default on everything, they look for a life preserver," Watts says. Also, if you have a very young credit file, an inquiry can count for more than if you've had credit for a long time.

What doesn't count in a score
Although the following information is not calculated in a credit score, a lender may consider these factors:
•Age
•Race
•Job or length of employment at your job
•Income
•Education
•Marital status
•Whether you've been turned down for credit
•Length of time at your current address
•Whether you own a home or rent