Do you know how the credit scoring system works?

What's your credit score?

Lenders use an automated "credit scoring" system to assist them in make decisions on loan applications. If you have a high score (700 and above) you stand a good chance of being approved. If your score is lower, you might still have other factors that will lead to an approval. But if you score is low (620 and below) you’re in trouble.

If you fall into this last category there is still hope. Our book “The Insider’s Secrets” can help you improve your score and your chances of getting a good loan.

In recent years, creditors have developed a variety of methods for approving or denying loans. One way creditors can quickly review thousands of loan applications is by using automated "credit scoring." Even if you don’t have any plans to apply for a loan in the near future, you will someday and we think you should know about credit scoring.

Why?

Because the next time you do need a mortgage, car loan, credit card or any other type of loan, your score will have a significant effect on your chances of approval and the interest rate you are charged if you are approved. It will contribute to the repayment terms and other conditions of the loan. Your credit score alone could even play a role in whether you’re approved at all. To be on the winning side of this scoring system, it helps to know the basics.

What Is Credit Scoring?

Credit scoring is a system that's designed to improve a lender's ability to evaluate the likelihood that you will repay a loan. It's based in part on credit scoring "models," which are computerized systems that look at a variety of factors relating to many consumers personal information and credit histories, such as age, income and level of outstanding debt. These credit scoring models are used to determine the likelihood that a consumer will repay a debt. The first scoring models were developed by the Fair Isaac Corporation and have become known as FICO scores. While there are many scoring models in use today, the standard is still the FICO model. The 3 credit rating agencies each have their own models and many companies have developed models of their own. It’s a good idea to get credit reports from all three of the credit reporting agencies as they are likely to differ. We suggest checking your credit at least twice a year just to make sure that the information is accurate. You can find steps to correct errors and misinformation in The Insider’s Secrets and at our website, http://www.theinsiderssecrets.net/

Scoring systems collect this data to try to predict a consumer's ability and willingness to pay future debts. Scoring systems usually produce a numerical "credit rating score". Lenders use these tools to help decide if a loan should be made and to set repayment terms. This three digit number will play a big part in your ability to borrow money and, ultimately, the cost of repaying those loans.

If a Score Is Low

A score in the lower ranges will not automatically disqualify you from getting a loan. But it may prompt the creditor to review your history more carefully before making a decision whether to approve or deny your loan. A low credit score will likely result in a higher rate of interest or more strict repayment terms than those offered to others. If a lender's system is properly designed, tested and monitored, it should give a faster and more impartial evaluation of creditworthiness than a loan officer could have made on his or her own.

A credit score, however, may not be the best way to try to predict whether someone will repay a loan in a timely manner. Among the reasons: the information that was reported to the company that developed the model may be inaccurate or the statistical assumptions behind the program may not be sound.

Credit scores are usually not released to consumers, at least for free. But under the Fair Credit Reporting Act, if you are turned down for a loan because of information in your report, you have a right to get a free copy of that report and to have any mistakes corrected. Catching and correcting mistakes may have a positive effect on your rating and would likely improve the chances that your application will be approved. The Fair Credit reporting Act also grants consumers the right to a free copy of their credit report from each of the three credit reporting agencies. You’ll be able to take advantage of this law at www.annualcreditreport.com. These reports, however, will not contain a score, for that you’ll have to pay; on average about $16 per report.

Improving Your Score

Just like building your own history takes time, it also takes time to improve your score...and your chances of getting a loan at favorable terms. According to a consumer brochure published by the Federal Trade Commission, you can boost a low score by "paying down outstanding balances, concentrating on paying your bills on time, and not taking on new debt."

We also believe it's a good idea to review your file periodically, to make sure it accurately reflects your history. That way you can provide missing details or correct inaccurate information before it gets factored into your score. If you’re unsuccessful in getting erroneous information removed or would like to explain extenuating circumstances, the Fair Credit reporting Act allows every consumer to have an explanation of up to 100 words included in their credit reports.

Getting the right information and help

Besides giving you all the information, tools and techniques you will ever need to buy and/or finance an automobile, there are a number of chapters in “The Insider’s Secrets” that deal with credit scoring issues. We guarantee that you will be an expert on these issues and many more by reading, and taking advantage of, the information we provide. You can also find help at our website, http://www.theinsiderssecrets.net/