Understanding Your Credit Score (continued)

Each credit bureau uses different methods to do this (which is why you will have different scores with different companies) but most credit bureaus use the FICO system. FICO is an acronym for the credit score calculating software offered by Fair Isaac Corporation company.  This is by far the most used software since the Fair Isaac Corporation developed the credit score model used by many in the financial industry and is still considered one of the leaders in the field.

In fact, credit scores are sometimes called FICO scores or FICO ratings, although it is important to understand that your score may be tabulated using different software.

One other thing you may want to understand about the software and mathematics that goes into your credit score is the fact that the math used by the software is based on research and comparative mathematics.  This is an important and simple concept that can help you understand how to boost your credit score.  In simple terms, what this means is that your credit score is in a way calculated on the same principles as your insurance premiums. 

Your insurance company likely asks you questions about your health, your lifestyle choices (such as whether you are a smoker) because these bits of information can tell the insurance company how much of a risk you are and how likely you are to make large claims later on.  This is based on research. 

Studies have shown, for example, that smokers tend to be more prone to serious illnesses and so require more medical attention.  If you are a smoker, you may face higher insurance premiums because of this. 

Similarly, credit bureaus and lenders often look at general patterns.  Since people with too many debts tend not to have great rates of repayment, your credit score may suffer if you have too many debts, for example. 

Understanding this can help you in two ways:

1) It will let you see that your credit score is not a personal reflection of how “good” or “bad” you are with money.  Rather, it is a reflection of how well lenders and companies think you will repay your bills - based on information gathered from studying other people.

2) It will let you see that if you want to improve your credit score, you need to work on becoming the sort of debtor that studies have shown tends to repay their bills.  You do not have to work hard to reinvent yourself financially and you do not have to start making much more money.  You just need to be a reliable lender.  This realization alone should help make credit repair far less stressful!       

Credit reports are put together by credit bureaus, which use information from client companies. It works like this: credit bureaus have clients - such as credit card companies and utility companies, to name just two - who provide them with information. 

Once a file is begun on you (i.e. once you open a bank account or have bills to pay) then information about you is stored on the record.  If you are late paying a bill, the clients call the credit bureaus and note this.  Any unpaid bills, overdue bills or other problems with credit count as “dings” on your credit report and affect your score. 

Information such as what type of debt you have, how much debt you have, how regularly you pay your bills on time, and your credit accounts are all information that is used to calculate your credit score. 

Your age, sex, and income do not count towards your credit score.  The actual formula used by credit bureaus to calculate credit scores is a well-kept secret, but it is known that recent account activity, debts, length of credit, unpaid accounts, and types of credit are among the things that count the most in tabulating credit scores from a credit report.

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