OK. You’ve found yourself in a bit of a financial bind. A loan would help a lot right now but your regular bank won’t help, you just don’t have a high enough credit score. You’ve chosen now to begin applying for short term loans for bad credit. These companies seem willing to help, despite your poor credit score. That’s great for now, but it’s also really about time you took the time to really understand credit scoring so that next time a short term loans bad credit won’t be your only option.
Credit Score Confusion
Credit scoring is a rather confusing issue and there are things about the various credit scoring models that are used today that even financial experts are not too sure about, mainly because the actual mathematical algorithms used to calculate credit scores are a closely guarded secret the specifics of which are known only by those who actually do the scoring (and these days that is usually a computer, not a person)
There are some basic things that every consumer should know about credit scoring that will make understanding that all-important credit score number a little easier. The first is that the term “checking your credit score” is quite a deceptive one because no one has just one credit score, everyone has several.
Each of the major credit reference agencies – Experian, Equifax and Callcredit- calculates credit scores in their own unique way. Therefore you have three different credit scores right there. Confused yet? It gets worse.
As previously mentioned, just how credit scores are mathematically created is a secret. What is known however is what the major factors are that the credit bureaus use to calculate them and how much a certain aspect of your credit report really matters. basically across all the scoring systems, it breaks down as follows:
Payment History – 35% of your credit score depends upon how well you pay on your credit obligations. The credit reference agencies only take notice of bills that relate to an actual line of credit. Like credit cards and loans, even short term loans for bad credit. Utility bills usually do not count, unless they are delinquent and are reported to a collections agency.
When it comes to payment history, late payments count against you as well as missed payments so to improve the credit score you have to pay attention to your bill due dates!
Positive Credit Lines and Debts – About 30% of your credit score is calculated according to the amount you currently owe on credit accounts as well as how much credit you still have available to you.
Length of Credit History – How old your positive credit accounts are is worth around 15% of your credit score. The older they are the better, the reason why financial experts say that a credit line that is older and in good standing should never be closed – even if you really do not intend to use it anymore.
Mix of Credit – 10% of your credit score depends upon the types of credit you hold. The credit reference agencies generally look favorably on those who have a good mix of credit accounts – some installment credit like a mortgage or car loan and some recurring credit, usually in the form of a credit card.
Credit Pulls – Every time you apply for any kind of credit the lender will pull your credit report and this will have an impact on your credit score with the company who provides the report and this “category” accounts for 10% of your final credit score.
How Lenders Use Credit Scores
When a lender asks for your consent to check your credit report on a loan or credit application what they usually really mean is that they are going to check your credit scores. They rarely ever care what the specific items are on your credit report – that is the credit bureaus issue, they depend on them to analyse the information and produce a score from it and it is the score that the lenders usually buy.
Lenders only buy one credit score and you, as a consumer have no way of knowing at the time you apply from whom they are going to buy that score and which score it is that they are going to buy.
Once lenders have your score they add in their own acceptance criteria – employment, income and a number of other unknown factors – to reach a final decision. No lender bases their answer on credit score alone but it is a very large part of the decision.
If you are turned down for credit you do then have the right to know which credit score your lender elected to use and then to receive a copy of the specific credit report that they got the score from that influenced their decision. This can actually be very helpful, as being able to see, in black and white, just why your credit is rated poorly will go a long way to helping you understand what you’ll need to do to improve it.
