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A Closer Look at Individual Credit Scoring System

By Ruth Racey
Published: Friday, September 4th, 2009

Every consumer must be concerned about his/her personal credit score. Some people think a good credit standing can be achieved just by opening new accounts or owning several credit cards. But achieving a good credit score is surely more than just that. To better understand, let’s take a look at how credit scores are calculated and how you can build a solid credit rating.

There are three major agencies that record and calculate consumer credit scores and these are Equifax, Experian and TransUnion. These three major credit reporting agencies use the FICO scoring system, a system for calculating individual scores developed by Fair Isaac and Company. The FICO score is a three-digit number ranging from 300 to 850 that is used to determine a person’s credit worthiness. A score of 750 and above is considered to be an excellent rating while a score of 650 and below is considered to be a poor score.

There are several factors that can affect your final credit score. This is where payment history plays an important role to maintaining good credit history. 35% of your score is based upon your timeliness in submitting your payments. This means, paying your loans, credit cards and other bills on time can significantly make or break your FICO score. Other essential factors that are considered are the type of account, your credit to debt ratio, public records.

Take note that your bank savings account, your personal assets and monthly utility bills are not reflected in your credit report. However, all loans (car loans, personal loans, mortgage) and credit card accounts in your name will all be part of your credit report. This is why it is crucial to be consistent in submitting your payment to all your creditors.

Is credit score reasonable basis to gauge a person’s credit worthiness? Although a credit report does not include other details such as the circumstances behind a low credit score, many lenders accept or reject a person’s credit application based on this number.

Yes, enjoying a good credit score will enable you to get easy approval when applying for a loan or a credit card. Aside from quick approval, it gives you a stronger negotiating power when asking for lower interest rates and better repayment terms. Banks, lending companies, credit card issuers, even insurers check credit reports when reviewing applications. Different financial institutions may use varying models in determining credit scores but the FICO scoring system is a recognized and most-widely used of all credit scoring systems.

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