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Your Credit Score - How It Works and Why It's So Important
One thing that everyone must know about their credit scores is that you don't have just one credit score - you have many credit scores. And, these scores change constantly. Before you can go to work preserving or repairing your credit scores, it is important to understand how the credit scoring system works, what factors are important, and why they are important.
Your credit score is designed to be a snapshot of your credit profile at any given time. When new information is added and old information is removed, your scores will adjust accordingly. As such, it is important to think of your scores as a fluid number - one that is likely to be different (for better or worse) in the coming months.
This fluidity can be both good and bad news. If you currently have a low score, the good news is that it can be increased over time. That time frame depends on the severity of the items on your report and how you approach the restoration process. In as little as six months, you can drastically improve your credit scores if you are motivated and dedicated to do so.
The bad news is that even great scores can take a turn for the worse if you ignore good credit practices and are not diligent about monitoring your credit report. When your scores are high, you must work hard to maintain those current levels to prevent unpleasant surprises when you can least afford them.
It is also important to understand that there are many different credit scoring systems in use, and they vary depending on the type of credit you are seeking and who is pulling the credit report. In fact, there are dozens of different scoring models in use today by different lenders and credit issuers. The most common is the FICO score.
FICO is a term that is often used as the generic word for credit scores - much the way Xerox is used when referring to any photocopy machine. But, the FICO score is a specific scoring system developed by the Fair Isaac Corporation. Fair Isaac is the company that developed the credit score and is the industry leader. Their scores are used by all three of the major credit bureaus and by over 70% of all lenders and creditors in America.
This is where it starts to gets a little confusing. Although the three bureaus use the FICO scoring system, each has their own way of calculating the score. Thus, when you receive a credit report from all three bureaus - a tri-merge report - you will get three different scores. It is further complicated by the fact that each of the bureaus may have different information in their files on you, thereby calculating their score based on different information.
But, wait, it gets more confusing. Each bureau not only has a slightly different scoring model that they purchased from Fair Isaac, but they also have different models for each credit type. So, your score will depend not only on which bureau is calculating the information, but also on the type of credit for which you apply. Some of the more common types of scoring models are consumer, mortgage, automobile, and insurance scores. This helps explain why you get a slightly different score when you order a report for yourself (you will get the consumer scoring model version) compared to the scores your mortgage lender gets (they get the mortgage scoring model version).
In all cases, the FICO score has one major purpose: to predict your chances of default.
About the Author Chris Esposito provides home renovation loans through CM Direct for people who wish to finance their home improvement project. If your credit score is not where you want it to be, CM Direct can assist you. For more info, visit www.DirectRehabLoans.com, or call (877) 876-3688.
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