What Is Credit?

Credit, simply put, is money you borrow to enjoy something now that you will pay for in the future. Credit cards, car loans, mortgages, even your utility bills are all forms of credit. In return for being able to enjoy something today - such as your house and vehicle - you pay interest or service charges to the lender, along with the original amount borrowed. Can you get credit? How much? And what interest will you be charged? That all depends on your credit rating.

Credit Scores and Ratings

Your credit rating, or your measure of credit worthiness, is most often reflected in your “credit score”. There are different types of credit scores and credit models out there, such as “FICO”, “Consumer”, “Vantage”, “Expansion”, and scores designed for specific industries such as Auto and Insurance scores. But since most people are most familiar with FICO, and this is the most widely used scoring system, we’ll focus our discussion towards this system.

What your FICO score represents is a scientific numerical rating of the likelihood that you’ll repay the money you’re trying to borrow. FICO scores range from 350 – 850 and the higher your score, the more likely you are to repay your loan. In fact, FICO (developed by the Fair Isaac Corporation) actually has a chart showing the range of scores compared to the likelihood you’ll repay a loan. “Good Players” are borrowers who repay the loan, “Bad Players” don’t.

The predictive chart looks like this:

As you can see, as your score moves up the chart, your rating and credit worthiness increases. Simply put, if your score is high, you are statistically more likely to repay the money you’re trying to borrow. Higher scores create less risk for lenders and often results in you being offered better terms and less application hassles - your lender feels more confident about lending you their money, and feels comfortable to not do as much checking up on you and verifying the information on your credit application.

There are 3 major credit bureaus who use FICO’s scoring formulas to calculate your credit score:

• Equifax
• TransUnion
• Experian

ALL these bureaus use the EXACT same FICO scoring system, yet it is very rare that someone’s FICO score will be exactly the same at each bureau. Typically, your score will be within a few points of each other at each bureau, but it is not unusual to have wide variances between the three.

Why Are The Scores Different?

The reasons for the variances in scores have to do with the timing of the reported information, errors in reporting, and the fact that many companies only use one of the 3 bureaus when checking you out.

Errors occur most frequently for people who have had past credit challenges, such as collections or bankruptcy. Each of the accounts involved has to be reported – by humans – to the bureaus, and humans make mistakes (oftentimes on purpose – but that is a discussion for another place).

And minor differences in scores can occur when you apply for credit and that company only uses one credit bureau to check you out. Many car loans or those “90 Days Same As Cash” loans frequently only use one credit bureau report to judge your credit worthiness, and each credit pull can lower your score a few points – but only at the bureau where the inquiry is sent.

Don’t Allow Mistakes To Stay On Your Report

Minor differences are normal and usually nothing to worry about. Major differences in scores indicates a problem that you should get to the bottom of. You have the right to dispute incorrect information on your report, and if there are mistakes – you should certainly dispute it. As there are so many areas in your life that can be affected by your credit score, you simply can’t afford to have mistakes keep your score down.

If you have a poor credit score and impossible to fix - in other words, you’ve had credit problems and you are now considered a “bad player” - take heart! Credit scores can be changed rapidly. These scores are heavily weighted towards your CURRENT activities. In fact, almost two-thirds of your credit score is based on how you are handling your current credit bills.

You can’t erase the past (unless it is reported incorrectly) but you CAN start today to get things back on the right track! How? You have a variety of options to wrestle your debts and eventually get back into a creditor’s “good books”:

• Debt Consolidation
• Credit Counseling
• Debt Management Plans
• Additional Tips to Solve Your Debt