CREDIT REPORTING FACTORS
Following are factors that are of particular interest to lenders:
  • Does the applicant have a stable job? How many years have they been at their place of employment? Do they have a responsible job title?
  • Does the applicant have a stable style of living? Have they been at their place of residence for five years or more? Do they own or rent their home?
  • Does the applicant exhibit stability with their finances? Do they have a checking and savings account? Do they have many recent inquiries?
  • Does the applicant have a good payment history on existing and previous lines of credit? Do they have a past credit history free of judgments, bankruptcies, charged off accounts, or other signs of financial mismanagement?
  • Does the applicant have a favorable debt to income ratio? (Debt to income ratio is a comparison of your outstanding indebtedness the income that you have to support debt repayment) Does it appear as though they are overextended on credit?

Credit Scoring
Creditors often rely on credit scores to help them determine the risk of lending to consumers. The information on a consumers credit file may be used to compile a score that will be used to determine if a consumer is granted a loan or line of credit. If a decision is made to grant a line of credit to a consumer, the credit score may be used to determine the interest rate that will be applied to the loan or line of credit. Generally speaking, the riskier it is to lend to a consumer, the lower the chances are that the consumer will be approved for the line of credit and the higher the interest rate at which the consumer will be required to repay the debt at if they are approved. Many lenders have "in house" scoring systems but they also rely on scoring models that are provided by credit reporting bureaus. Different credit bureaus use different credit scoring models, but the standards of determining a consumers credit worthiness are consistent from model to model and they are based on the Fair Isaac Company’s scoring criteria. The scoring system that is used may be termed a "Beacon," "Empirica," or a "FICO" score depending on what credit bureau is supplying the score. Some lenders rely upon "merged" credit reports that provide a compilation of consumer account and credit scoring information from more than one reporting bureau.

UNDERSTANDING CREDIT AND IMPROVING CREDIT WORTHINESS

Weighing the Effects of Credit Information
The impact that credit rating factors can have on evaluation of credit worthiness is relative to the time frame during which they are reported and the relative "maturity" of the consumer’s credit history. If derogatory information has been reported to a credit bureau in the recent past, it will most likely weigh heavier against a consumer’s credit worthiness than information that was reported a relatively longer time ago. Generally speaking, creditors are more concerned about information in the near past because it is more indicative of the consumer’s present financial circumstances. That is not to say, however, that older derogatory information may not effect the outcome of a loan application or the interest or payment terms that are offered on a loan or credit card.

If derogatory information is reported on a consumer who has a "mature," long standing, and otherwise positive credit history, the information will not affect the consumer’s credit worthiness or score as much as it would an individual who has a relatively "immature," short, and less comprehensive history. A "mature" history is not only determined by length or account history, it is also determined by the kind of credit that the consumer uses. In other words, positive or negative information concerning a major credit card account (Visa, MasterCard, Discover, or American Express) or installment loan may weigh heavier than information that is reported on a merchant, department store or gas card. Finance company accounts may weigh heavier against a credit score, especially if they were established in the recent past. Finance company loans are regarded as riskier loans that consumers turn to when they run out of conventional options. They are relatively easy to acquire and often require payment of very high interest that drives monthly payments higher. The higher payments can contribute to financial mismanagement and over-extension on credit obligations.

Improving Your Credit Score Order and reviewing your credit report
You will never know what is on your credit report unless you check it or get denied for a credit line. Order a copy of your credit report and review it to make sure that all of your personal information and account history information is complete and correct. In accordance with the Fair Credit Reporting Act, if you are turned down for credit, you may obtain a free credit report, provided you request it within 60 days. Credit reporting agencies are required to provide trained employees to help consumers interpret information that is found on their report. If you would like to order a credit report that merges credit information from the three major reporting bureaus, or if you desire additional credit monitoring and credit inaccuracies, Equifax.

Sometimes account histories for other individuals are mistakenly included in your report, especially if you have a common last name. If you are a "Jar" and your father has the same name, sometimes you can mistakenly inherit his credit history. Mistaken identity can work for you or against you, depending on the individual whose credit you mistakenly inherit, so dispute any derogatory information that is not yours. If there is derogatory information on your credit report that belongs to your spouse or you are divorced, you can request to have a credit report that is in your name only. This will only work if you were not listed as a co-applicant on the account. Otherwise, derogatory information may carry-over to your individual credit report.

Bring your accounts current
If you are delinquent on your accounts, you should bring them up to date as soon as possible. Delinquency weighs heavily against your credit score because creditors believe that past history is reflective of future expectancy. Contact your creditors and make arrangements to make up the arrears on your obligations. Some creditors have "in house" programs through which they will bring you current after making a specified amount of consistent payments, regardless of whether you make up the arrears (known as reaging).

Voluntarily close your accounts
When you voluntarily close an account, the creditor is responsible for reporting it to the credit bureau and it should be documented on your credit report as "closed by consumer." The fact that you took the initiative in closing the account is an indication that you understand how to maintain reasonable use of credit and you are in control of your spending. After notifying a creditor that you want to close your account, you should always ask a creditor to provide a letter confirming that the account was reported to the credit bureau as "closed by consumer." By doing so, you can easily have it corrected if you later find that it is reported incorrectly on your credit report.

To optimize their credit score, consumers must maintain open accounts, but the number of accounts should be limited. Credit scoring models rate against "Too many bank revolving accounts" and "Too few bank revolving accounts." Establishing a consistent timely payment history on one or two major credit cards and limited merchant cards (department store cards and gas cards) will help to build a sufficient credit history. It is wise to close as many merchant cards as possible, especially on accounts that you opened solely for the purpose of making large "one time" purchases. For example, if you opened a credit line with an electronics store to purchase a computer, you should voluntarily close the account when the balance on the computer has been paid off, especially if you have no need for any other merchandise from that store. Otherwise, the account would remain open, which indicates that there is a potential that you will charge more debt. Generally speaking, large amounts of available credit can weigh against your credit score. The higher the cumulative total of available credit, the riskier it is to lend to the consumer. If a consumer has easy access to large amounts of available credit, one spending spree can cause them to go from financial stability to financial trouble.

Another reason why you should consider closing unnecessary charge accounts is because revolving debt weighs heavier against your credit score than installment loan debt. Installment loan debt is debt that credit grantors underwrite (review for approval) each time a consumer requests an extension of credit. It is considered to be more regulated and consumers are less likely to get into a difficult financial situation because if they are risky to lend to, the loan will be denied. However, revolving debt is relatively easy to acquire by the consumer and if a consumer has high available balances on revolving debt, regulating use of their credit is at their own discretion, not the lenders. High credit limits on revolving debt may indicate a consumer’s inability to control their spending behaviors. Successfully managing revolving debt is necessary to build credit but too much revolving debt may negatively affect your credit worthiness.

Pay down loan and credit card balances
If your balances are high relative to the loaned amount or credit limit, it may weigh against your credit score. High balances in comparison to your credit limit may be considered a sign that you are overextending yourself and dependent on credit to maintain, or artificially enhance, your style of living. It can be regarded as an indication that you are not in control of your spending habits because you consume up to the maximum that your credit will allow. If you pay your credit cards off on a monthly basis or carry reasonable balances and establish a consistent payment history on credit cards, it may assist you in building credit. However, carrying high balances and exhausting available credit limits may be considered unreasonable use of credit and may weigh against your credit score. Having too many accounts with balances on them may also weigh against your score.

Limit the number of new accounts and inquiries
An excessive number of new accounts (accounts opened within the last year) or inquiries may indicate that a consumer is desperate for credit, which may be reflective of a credit problem. Too many new accounts can weigh against your credit score. Numerous inquiries may be considered a threat to a lender because they may indicate that a consumer is attempting to acquire multiple lines of credit at the same time, which could lead to the consumer being overextended and at risk of defaulting on their obligations. In accordance with the Fair Credit Reporting Act, inquiries can remain on a consumer’s credit for a maximum of two years. Numerous inquiries may be reflective of a consumer who is subject to excessive impulse buying desires or a consumer that is dependent on additional credit to get out of a financial crisis.

Credit scoring is based, partially, on the maturity of the credit lines that are on a consumer’s report. Accounts that have been established for years with a good payment history and reasonable use of available credit can stabilize and improve a credit score. However, accounts that are less than a year old, do not have a mature history and may weigh against the score because the consumer’s ability to maintain long term stability with their increased spending power has not been established. Derogatory information that is reported on a consumer that has a mature history may not weigh against the credit score as much as derogatory information that is reported on a consumer who’s credit history is not mature.

Pay off accounts that are public records, "charge-offs" and collection accounts
Make arrangements to pay on accounts that have been charged off accounts or placed in collections. Negotiating a settlement (see negotiating a settlement) on collection accounts may be a very effective way of paying balances off at reduced amounts. If you have collection accounts, judgments, or tax liens, you should pay them off as soon as you can, depending on how close you are to having the accounts drop off of your credit report (see guidelines concerning information as reported on your credit report.) Balances on tax liens and judgments are recorded as public record and have been deemed by the courts as legally owed by the debtor. Unsatisfied public records are considered good indicators that a debtor is not financially responsible and will weigh heavily against their credit score. Be sure that no information exceeds the reporting time-frame limitations as set forth by the Fair Credit Reporting Act.

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