The credit score, one of the many tools creditors use to help decide the outcome of credit requests, has been enhanced. This refinement is a boon to consumers by giving a broader picture of a person's credit profile.
Fair, Isaac and Company, Inc., the San Rafael, California company that pioneered the FICO credit scoring system in use today, now has a product titled "Next Generation Credit Risk Score." Risk-factor scoring is used in all credit-granting situations-including mortgages-and by its ability to draw upon the highly predicative powers contained in the rich consumer credit databases, the enhanced FICO numbers promise an even sharper image.
Although the exact details of how the new scoring system is going to function are information confidential to Fair, Isaac, the outcome to consumers is likely to be a broader, and therefore possibly more forgiving, measurement of a person?s risk as a potential borrower.
In other words, if you were in a gray area with your old credit score, the new system might help push your score into the light of credit approval.
A Refresher Course In Credit Scoring Basics
To understand the benefit Next Generation scoring may bring to your score, it is important to first understand how basic credit scoring works. FICO scores run anywhere from 300-900, depending on what system is being used. Credit scoring is a process designed to help predict the future; at least the future regarding whether or not you will live up to the credit obligations you incur now.
When you submit a request for a loan or for credit, the lender or creditor requests a credit bureau report showing your credit-related history. Credit reports usually come loaded with positive as well as negative information. The Next Generation scoring helps cut through this massive amount of information more precisely than the old FICO scoring could. You may want to ask lenders which version they are using because not all of them use the Next Generation score.
Based on past experience, Fair, Isaac has determined the most powerful indicators of future credit risk, namely severity, frequency, and recency, and applied these in the making of their Next Generation scoring. They've developed models that weigh financial data and produce a score that indicates risk level. Lenders can then decide whether or not they want to extend credit to borrowers who represent that particular level of risk.
Severity refers to a how damaging a situation is likely to be. In other words, a 30-day late payment is not as serious as a 90-day late payment and one late payment is not as credit risky as several late payments, thus the reference to frequency. Recency refers to how recently the credit offense occurred. A credit lapse five years ago is not as risky as a credit lapse only a year ago. If you've been paying your bills punctually for the last couple of years, you're generally in better shape because your recent history is good.
Your available credit may also affect your score. If you have no cards, you have no credit history and thus, no way of showing you can be trusted based on past performance. If you have too much credit-especially with a sky-high total credit limit or high outstanding balances-you may seem just as risky as a person with no credit. In fact, once you hit seven open credit cards or more, your score may start to decline on that information alone.
How Do I Raise My Score?
Really, the only way to help raise any credit score is to pay your creditors on time, every time, for at least two years. This is not a guarantee, of course, due to the many unique credit-scoring factors involved in each in person's report, but a history of borrowing and paying prudently in recent years never hurts your score and, sometimes, can turn your score around more than you might think.
Another good rule of thumb is to request new credit with restraint and use it regularly, but prudently. A few credit accounts handled well can go a long way toward keeping your score high or helping to increase it. This, coupled with Next Generation credit scoring, just may cast a brighter light getting the loan or credit you need.
Your Personal Credit Score doesn't just let you see the type of score lenders use, it also gives you valuable information that can help you improve your credit score. It comes with a personalized analysis that shows you the factors that are impacting your rating. Plus, it includes tips based on your report to help improve your credit rating.
Article brought to you by ConsumerInfo.com