A lot is made of credit scores, especially in recent years with the collapse of the housing bubble and the problems that arose from it. But what exactly goes into determining your credit score? Is it foolproof or are there issues with the system? What flaws are there? Does everyone still use it or are there other methods being used in recent years that we haven't heard about?
What Is Your Score?
There are several factors that go into determining your score. Ranging between 300 and 850, the score is influenced by the following factors with a rough weight placed on each:
• Payment History - 35%
• Credit Utilization (Amount of Credit Used verus How Much Available) - 30%
• Length of Credit History - 15%
• Types of Credit Used (Mortgage, Car Loan, Credit Cards, Student Loans, etc.) - 10%
• Recent Searches for Credit Score - 10%
By making your payments on time, having a good length of credit history, and keeping a good ratio of credit used to available credit you can keep your score closer to the higher end of the credit score spectrum which can result in you getting additional benefits on loans, including preferential rates.
Problems With The Scores
While most institutions have, at least at one time or another, used credit scores for a variety of reasons, there are some issues with the practice and the scores that have given people concern about their viability when determining how suitable for a loan a person is.
The biggest concern over the system is that they can be gamed to incorrectly give a better impression of a person's credit standing. Since a large part of the score is determined by the ration of credit used to credit available, a person can increase their credit limit on a credit card in an effort to increase their credit score even though this has no bearing on their ability to repay a loan.
In addition to gaming the system to increase scores, the major criticism of the score system is that it's not a good predictor of risk when loaning to an individual. This became evident during the housing crisis when banks were giving out subprime loans that people couldn't afford to repay regardless of what their score indicated since as soon as the rates increased on the loan they couldn't afford them.
Still In Use?
Even though there's some criticism of them, the scores are still widely used for everything from loan applications for things like homes and cars to some employers making it a condition of the hiring process. Some, however, are either completely abandoning the use of credit scoring or are also taking into account a potential buyers current debt and employment status and income when considering them for a loan, as this gives a better picture of their ability to repay the loan.
Know Where You Stand
Even if you're not looking to make a large purchase in the near future that would require a loan, knowing where your score stands is a good way to know whether or not you need to work on improving it. In addition it's also a good way to find out if you've been the victim of identity theft as you can find out if there are open credit cards or loans in your name that you didn't authorize.
Tristan Campbell has dealt with getting approved for a home loan and with having his credit checked. Fortunately he was able to get a zero closing costs mortgage by getting his loan through CapCenter. To learn more about closing costs and how to avoid them visit CapCenter online at: CapCenter.com.