In the 1996 movie Evita, Madonna as Eva Peron addresses the Argentine nation saying, "Give me credit, I'll find ways of paying." In real life, you can't get credit based on a promise. You can't pay for it either.
Creditors grant credit. And their decision is based on one determination: credit scoring. They use credit scoring to see if you're eligible for a credit or loan. Not all lenders use scores, but those who do use them to make decisions about whether you'll pay them back -- and on time.
What exactly is credit scoring?
Ultimately, it all boils down to your financial past and present, says David Horowitz, chief consumer advocate at lowermybills.com. "Scoring involves what your credit record is, how you pay your bills, and what your past experience has been," he says.
Major credit bureaus gauge different pieces of information to determine your score from statistical models. The actual number of your credit score will fall somewhere in the industry standard of 500 to 800. A higher score means a better chance of having a request approved. Most credit scoring systems look at many factors, such as number of credit accounts, total credit available, amount of outstanding debt and late payment record. Those factors correlate to your credit merit. But sometimes there are even more factors included that might seem unrelated to your finances.
For example, some systems score the age of your car. That might seem strange, because it has nothing to do with you being credit-worthy. But it's perfectly legal to use these criteria as long as they don't discriminate on race, sex, marital status, national origin, religion or age, according to the Federal Trade Commission in Washington.
Lending companies decide which scores are worthy -- and which aren't -- for different types of credit. "It's most important to know that the score is a subjective number," says Marianne Gray, president of the Consumer Credit Counseling Service of Fort Worth, Texas.
The Score Facts
In addition to factors already mentioned, scoring agencies typically consider the following:
- Your education level. A college-educated person is given more points than a high-school kid.
- The number of years you've lived in one place. If you've moved a lot, you lose points. But if you've moved because of a better job with more pay, you can recover those points.
- The number of years you've worked for one employer. Scoring agencies favor stable people.
- If you own a home you're awarded more points. Renters are considered temporary and are less dependable to repay loans.
For years, industry leader Fair, Isaac & Co. and other scoring firms said that if they revealed the scoring system and the criteria to determine your score, their services wouldn't be needed. You could obtain your credit report from a credit-reporting agency, but it wouldn't reveal your score, although you could learn what lenders know about you and your history.
Because consumers have protested to lenders for years, Horowitz says, companies are starting to reveal scores. "According to regulations formulated last year, agencies would have to now actually now let you know what the score was and what it was based on," he says. But only some of the bigger companies will grant you your score.
What's the best way find out your score? "Deal with a bank or lender you're comfortable dealing with," says Horowitz. "You'll get you basics on what was scored and how it was scored." CCCS's Marianne Grey advises contacting the credit reporting agencies, because they're the most reliable source. The three biggest agencies are Experian (888-EXPERIAN), TransUnion (800-916-8800), and Equifax (800-685-1111).
In a specific case, such as when you're going to buy a home, Horowitz advises going directly to "a real estate person that you know; she can tell you what your score is." That real estate agent wants your potential sale to go through, so they'll do whatever they can to get your score from a lender.
Despite the emphasis on determining your score, Grey says, "Worry less about your score and more about if your credit report is accurate." Because technology errs, checking your report ensures accuracy.
Maximize Your Score Checklist · Make sure your credit report is accurate. · Keep your revolving debt as low as possible. · Don't apply for too much credit in a short period. · Pay your bills on time -- that includes utilities. · Don't let overdue bills get past the 30- or 90-day factor periods.
For more information about credit scoring issues, write to Correspondence Branch, Federal Trade Commission, Washington, D.C. 20580, or check www.ftc.gov.