By: Peter Bolduc

As recent as a few years back, the term "Credit Score" was not very commonly used in our society. While there were who understood the term and its purpose, the mass majority, although realizing that there was a system out there that their credit, they did not have a term to stick to it.

Today, however, due to a number of factors such as increase Identity Theft and mass media marketing campaigns there are very few who are not aware of the term Credit Score. The goal of this article is to add understanding on the personal to the recognition of that term.

A Credit Score is a number between 300 and 850 based on a statistical analysis of an individual's credit activity. It is used to represent the credit worthiness of an individual. How likely that the individual will pay his or her debts. A credit score is based on their credit report information which is typically sourced from credit bureaus and credit reference agencies, typically from the three major credit bureaus.

Lending institutions, such as banks, finance companies, mortgage lenders, and credit card companies, use an individual's Credit Score to evaluate the potential risk posed by lending money to that individual. Lenders use Credit Scores to determine who qualifies for a loan, at what interest rate the loan is issued, and what credit limits are determined.

The use of credit scoring prior to granting credit is a trusted system throughout the industry. Credit scoring is not limited to banks, however. Organizations, such as mobile phone companies and government departments employ the same techniques.

While there are many others, such as NextGen, VantageScore and the CE Score, The most widely known score in the United States is FICO, which is most widely used in the mortgage industry. FICO is an acronym for Fair Isaac Corporation, the company that provides the most well-known and most widely used credit scoring system in the United States.

The FICO score is calculated by applying statistical methods, developed by Fair Isaac, to information in one's credit file and is primarily used in the consumer banking and credit industry. FICO scores show how likely it is that a borrower will default. No public information is available to determine what the scores mean in terms of statistics. A separate score, BNI, is used to indicate likelihood of bankruptcy.

As stated, banks and other lending institutions use Credit Scores as factors in their lending decisions. Whether credit is denied or approved, what interest is charged, what income level and asset verification is required is all based on an individual's credit score.

The FICO score actually uses slightly different scoring methods to rate a consumer's suitability for three different types of credit; mortgages, auto loans, and consumer credit. Each reflecting the different credit risks of these various types of lending. It is not unusual for these scores to differ by as much 50 points or more for the same borrower.

There are three major credit reporting agencies in the United States. Although often times inaccurately referred to as "credit bureaus", these agencies; Equifax, Experian and TransUnion, also calculate their own credit scores. These additional scores differ depending on what they are meant to predict, what statistical methods used to determine a score, and what information is used and how it is weighted.

These additional Credit Scoring Systems are numerous and are agency specific. For example, Beacon, Beacon 5.0, Beacon 96, and Pinnacle scores are available only from Equifax. Empirica, Empirica Auto 95, Precision Score, and Precision 03 are available only from TransUnion. And, Fair Isaac Risk Score at Experian.

These various Credit Scores are developed for the different agencies by Fair Isaac, each differs and are periodically updated to reflect current consumer repayment behavior habits. The NextGen Score is a scoring model designed for consumers.

In an effort to make credit scoring more consistent across the board, in 2006 the big three credit reporting agencies introduced Vantage Score. Vantage Score uses a different number range from the FICO score. It ranges from 501 to 990 and also assigns letter grades from A to F to specific ranges of scores.

A consumer's Vantage Score may differ from agency to agency, but the difference would be entirely due to differences in the information reported to the various agencies, not due to differences in scoring systems. Since FICO is still widely used by lenders, the agencies continue to offer FICO scores (or their closest equivalent) as well.

Most credit scores use a multiple-scorecard design. Each version may use individual scorecards, and an individual potential borrower is typically compared with other previous borrowers. In other words, a borrower with one 30-day late payment will be scored against a population with some similar delinquency. A borrower with two 30-day late payments will be scored against a population with like credit faults. The individual is then graded according to which variables indicate a risk within that group.

Nearly all large banks also build and use their own systems for credit scoring purposes, and are often times in conjunction with outside scoring formulas.

The systems used to generate credit scores are subject to federal regulations. The Federal Reserve Board's Regulation B, which implements the Equal Credit Opportunity Act, expressly prohibits a credit scoring system from considering any "prohibited basis" such as race, color, religion, national origin, sex, or marital status. It also stipulates that credit scoring systems must be "empirically derived" and "statistically sound".

In addition, if an adverse action, a denial of a credit application, is taken as a result of the credit score then the specific reasons for the denial must be provided to the individual denied. The statement "credit score not high enough" is insufficient. The reasons for denial must be specific; "too many delinquencies 60 days or greater" and such.

Credit scores are designed to measure the risk of default by taking into account various factors in a person's financial history. Although the exact formulas for calculating credit scores are closely guarded secrets, the Fair Isaac Corporation has disclosed the following components and the approximate weighted contribution of each:

• 35% punctuality of payment in the past (30 Days Past Due)


• 30% the amount of debt, expressed as the ratio of current revolving debt to total available revolving credit


• 15% length of credit history


• 10% types of credit used


• 10% recent search for credit and/or amount of credit obtained recently

Keyword Articles: http://www.keywordarticles.org

Peter Bolduc is the Managing Editor for Rebuild-Credit.us a site committed to assisting consumers in obtaining and maintain a quality credit score.
Submitted by: Super Article Submitter

To explain what makes up your credit score in as simple terms possible, this is how it works

Your Payment History (35%) Makes up the largest factor in determining your score. This is a picture of how you pay your bills.

Credit Utilization 30%: The percentage of available credit used. Keeping your account balances below 50% of the available credit limit will maximize your scores. For the purpose of this article, this is where we will find the most room to quickly increase your scores.

Credit History 15%: A more seasoned account carry more weight than one that was just opened.

Inquiries 10%: When you apply for credit, an inquiry is made to your credit. If you have too many inquiries, your score can be negatively effected.

Credit Types In Use 10%: The number of accounts in use, and the type of credit accounts. Finance company accounts are of the lowest value, and too many of them can cause a negative effect on your scores.

Ok, now we have some powerfull knowledge. It's time to put it to use with 2 things we can do in about 30 minutes to increase our credit scores...

Increase your credit limits: This is actually easier than you think. It is truly remarkable what will be granted to you simply for the asking. What I want you to do is simply call each of your credit card companies and ask them to increase your credit limit. One technique you might also use is to tell them you are doing some financial house-cleaning and are considering getting rid of the card and using one with a higher limit and better interest rate, unless they can give you a better offer. In my experience, I have found this to be successfull 100% of the time.

Here is an example of what can be achieved. You have a credit card with a balance of $4,000 and a limit of $5,000. This means you are 80% utilized. After using the above technique, your limit is raised to $6,500. Now you are only 62% utilized. Immediately your credit scores have increased. Keep in mind that we want to ideally keep our balances at 50% or lower compared to our credit limits. This segways to the next tip.

Lowering your balances to add more points. Continued from the above example, you are now utilized at 62% on your credit card. What this means is that you still have room to further increase your scores. If you coule put just $750 on this credit card, you could bring the current balance to 50% of your new credit limit ($6,500 credit limit, with a balance of $3,250). You might be saying that you don't have $750 to put down on your credit card. Ok, you could stop right here, since you already increased your scores, and you can most likely get the limit raised for all your credit card accounts. However, if you are trying to buy a home, or a new car, you can potentially save thousands, or even tens of thousands in interest on that new loan and even get a lower monthly payment, just by paying a little down on your current accounts. When that results in higher credit scores, you may qualify for much better loan terms. In one case, a client paid down $450 on one credit card and was able to increase their scores so they could purchase their new home with zero down, instead of the $5,200 required down payment they were previously facing.

If you use these powerful techniques, you are sure to increase your scores quickly and easily. I have seen it work over and over. One recent client was able to increase their credit scores by 105 points after getting the credit limits raised on all three of their credit cards in less than 30 minutes. You have nothing to lose by making a couple calls.

Keep in mind that these techniques work best for those who have a good credit history, and at least 3 open, established credit accounts. For those with more challenged credit or a negative credit history, a more aggressive approach and credit repair strategies may be more appropriate.

Jon Ochs has over 12 years of experience in the credit and debt field and is the founder/CEO of one of the most trusted and respected Credit Report Repair companies in the nation.

The Fair Credit Reporting Act (FCRA) is a U.S. federal law that regulates the collection, dissemination, and use of consumer credit information. Along with the Fair Debt Collection Practices Act (FDCPA), it forms the base of consumer credit rights in the United States. It was originally passed in 1970 and is enforced by the US Federal Trade Commission.

Red Flags Compliant™ is the FASTEST and EASIEST way to become compliant with the FTC Red Flag regulations. The deadline for compliance is May 1st, 2009. Are you ready?
The Red Flags Rules are a part of section 114 of the Fair and Accurate Credit Transactions (FACT) Act of 2003.

Any Company that works with Consumer Credit is now required to have in place an Identity Theft Prevention program by November 1st, 2008.