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Credit Scoring and the Lending Industry


 
Credit scoring is crucial to your ability to get a loan. When you apply for a mortgage, your lender will request a credit report from a credit reporting company. This is usually a local or regional company. This company assembles a credit report electronically. It usually comes from one or more of the major agencies, but it can come from several sources.
 
The local credit reporting company receives a numerical score, along with the information. The score represents many things, including a composite of the borrower's credit history, employment, and ability to save. Most people don't know is that their credit scores can change daily because of information streaming into their credit file. That is why someone can apply for a mortgage with one company today and have a FICO score of, say, 688, and apply with another lender a week later and that score can be higher or lower, depending on the information received at the bureaus that week.
 
The major credit bureaus do not reveal how the scoring model works. However, because of the multitude of errors reported to peoples' credit files, Congress has been applying pressure lately to make credit bureaus more careful about the accuracy of the information they report and to tell what goes into the scoring models. In order to improve their scores, people need to know how to improve their scores.
 
This is critical because the lending industry is moving toward "risk-based" pricing. What this means for you is that the higher your credit score, the less work they will have to do to prove that you are creditworthy. But even more important, your cost for the loan--your interest rate--will directly reflect your scores. While this system is unfair to some, it is great for those who maintain impeccable credit. It's one way that good credit risks can be rewarded. In the past year, the credit industry has already seen a dramatic reduction in paperwork requirements and risk-based pricing (rates and fees) has become usual.
 
If you have recently obtained your credit report and you are not happy with what was reported, you can take steps to correct the erroneous information on it. There are also proactive things you can do to improve your scores, if you are anticipating applying for a mortgage anytime soon. Following are a few hints now as to how to be proactive in improving your scores from where you are today.
 
The first is the most obvious. Pay all your payments on time. Secondly, don't apply for any new credit you dont need. Every time you sign and return a new credit card offering, or open that second account at a department store because you get a 15% discount, an inquiry will be generated and that will reduce your score. Next, if you must maintain credit card balances, try to keep them at a level that is 35% - 40% of the maximum credit limit.
 
Strangely enough, consolidating all your credit cards onto one can hurt you if the balance is at the credit limit. The fourth point is that if you get into a dispute with the phone company and it isn't a huge amount, pay it and move on. Even small collection amounts can really hurt your score.

 
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