An Inside Look at How You Score
Do you know what affects your credit score when you fill out a credit application? You might be surprised.
Your credit score is a number that is calculated based on a bunch of factors that lenders use to decide whether or not to lend to you. The better your score, the more likely you are to get the loan, line of credit or credit card you're applying for. And the better you score, the lower your interest rate will be. While the industry would like you to think your score is simply based on your credit history, that just ain't so. A whole bunch of factors - some of which might surprise you - are taken into account in deciding if you'll be a "good" customer. Good, of course, means profitable.
I don't have the best credit score going. Does that surprise you? The main reason is that I'm determined to pay off my credit cards in full every month so I incur no interest. Hmmmm. Not very profitable, am I? And that's why my score is lower. If I made my minimum payment every month, my score would be higher. No wonder people who are over-extended are going further into the hole all the time. Their great credit scores are giving them access to more and more credit.
The "Credit Scoring System" is a numbers game: The more "points" you score, the better you do. But do you know what influences the "points" you receive? You might be surprised.
While you may be tempted to lie about your age to your friends, your credit score knows for sure… With all the interactive computer systems in use today, there are no secrets. So while it may be tempting to fudge your birth date on an application, especially if that 20-something is looking over your shoulder, don't. If a creditor catches you in a lie, they aren't going to trust the rest of the information you provide either, and you won't get the loan.
Under 21? Score zero points. Hell, you're still a kid. Between the ages of 24 to 64 years give yourself a point. You're probably working. Over 65? Zero points… you're old!
Marital status? Unmarried, sorry babe, but creditor's think you're a higher risk if you aren't hitched so no points for you. If you are married, give yourself one point. Now you'd think that being divorced might work against you (all that spousal and child support), but most creditors don't give a whit.
Dependents? No dependents? Score zero. You're probably still drinking your money away like a teenager since you haven't yet "settled down." And with no "ties that bind" you could skip town at a moment's notice. Not good for collections. One to three dependents? Score one point. You're a solid citizen. More than three dependents? Score zero. Have you no self control? And don't you know you that with all those mouths to feed you could get in debt over your head?
Home address? Live in a trailer park or with your parents? Oooops. Bad risk. Score yourself zero points. You're showing no stability and could skip town with nary a look over your shoulder. Daughter, you have to put down some roots. Rent an apartment? Give yourself one point. Own a home with a big fat mortgage? Good for you. Score three points. See, someone has already done some checking and you qualified for a mortgage, so you can't be all bad. Own your home free and clear? Even better. Take four points. You've proven you can pay off a sizable debt and now you have a pile of equity.
Previous Residence? Zero to five years (some applications only go to three years), score zero points. You move around too much! Over five years? You're stable so score one point.
Years on Job? The longer the better. If you have less then one year at your present employer you'll earn no points at all, which explains all the whining from the newly working who can't get approved for a credit card. One to three years on the job will earn you one point. Four to six years is worth two. Over seven years at the same company and you're probably bored out of your mind but you'll score three points.
What do you do? Unskilled? You get one point because you have a job! Skilled? Two points. Professional? Three points. Isn't it obvious that the more education you have, the more job stability and bounce-back ability you have? The creditor decides the classification.
Monthly Income? The more you make, the better. Here's an example:
Monthly income Points
This score varies significantly by creditor depending on your geographical location, the type of job you hold down, and myriad other factors.
Credit History: Your track record is a good indicator of how you'll behave in the future. If you've been delinquent before, there's no reason to think you won't be delinquent again. Creditors belong to at least one reporting agency and share their information liberally with each other. Of course they're more likely to believe their own information than somebody else's. So if you paid off a loan with them, give yourself five points. Good record with other creditors should earn you two or three points.
Having a savings and/or checking account with a balance over $500 will earn you a couple of points providing you didn't open up the account last week. Hey, it makes you look stable if you've had your savings account for three years and have steadily built up a balance… which is another good reason not to spend every cent you make.
Having a phone in your own name earns you a couple of points because creditors have a way to contact you if you fall behind in payments. So don't be tempted to leave your phone number off the app because you don't want to have to deal with telemarketers.
If it looks like your picture is bleak, you'll have to get to work to create a brighter image of yourself.
Try building up your credit record by getting a secured credit card and establishing a sound repayment history.
Take out a loan for $2500 and put the money in a 30-day term deposit. Use the term deposit to repay the loan at the end of 30 days. Then do it again. (You'll likely need your banker's help to make this work.) You'll pay a little interest, so it'll be like "buying" a credit history. But you might think it's worth it.
If you have more patience, open a savings account and deposit $300. Now get to work putting aside $25, $50, $100 a month to build your savings up.
Or you can take out a loan to contribute to a retirement plan, and then pay it off monthly. Make sure you make your payments in full and on time.
There now, you're looking better already.