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Credit Scoring 101
Don't worry, Credit Scoring 101 doesn't require any prerequisite courses, but you'll want to be ready to learn about a few tricky algorithms and number crunching. Grab your #2 pencil and let's get started!
History
The credit scoring system became prevalent during the 1960's as a way for lenders to quickly evaluate a potential borrower's creditworthiness. The system was found to accurately predict financial risk over time and grew to several different industries. Now credit scoring is used by lenders, insurers, landlords, employers, and utility companies to evaluate your credit behaviour.
Algebra
Thousands of different credit scoring formulas exist today for various evaluation purposes. Each unique credit scoring system is accurate and correct for its own application. The credit scores you can order online use an algorithm created for consumers that approximates these different formulas. Your online credit score may vary a bit from the score your lender uses, but they should be in the same range.
Chemistry
The basic credit scoring formula takes into account several factors from your credit profile.
- The impact of each element fluctuates based your own credit profile:
- Payment history — A good record of on-time payments will help boost your credit score.
- Outstanding debt — Balances above 50 percent of your credit limits will harm your credit. Aim for balances under 30 percent.
- Credit account history — An established credit history makes you a less risky borrower. Think twice before closing old accounts before a loan application.
- Recent inquiries — When a lender or business checks your credit, it causes a hard inquiry to your credit file. Apply for new credit in moderation.
- Types of credit — A good record A healthy credit profile has a balanced mix of credit accounts and loans.
Economics
When you are preparing for a major purchase make sure you check your credit profile and score from TransUnion. Looking at your profile and score a few months before your loan application will help you get a complete picture of your credit health. Worried if your credit score makes the grade? If your credit score is above 650 you will probably qualify for a standard loan. Under 650, you may have trouble receiving new credit.
If your credit score is a little low, pay your bills on time, reduce your debt, remove inaccuracies and avoid new inquiries for a few months to give it a boost. Plus, don't forget that your credit score is not the only factor a lender may look at when they are evaluating your financial standing.
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