- The most widely used credit scoring system is called the FICO score (an acronym for Fair, Isaacs, & Co., the company that developed it). This is the credit score that all of the major credit reporting companies (Equifax, Experian, and TransUnion) use. The FICO score can range anywhere from 300 to a perfect score of 850. The score summarizes the contents of a person's credit history and tells lenders how much risk there is in loaning a person money.
- Whether a credit score is considered bad depends partly on what type of credit a person is applying for and from whom. For a home mortgage, most lenders follow the lead of Fannie Mae and Freddie Mac, who consider any score under 620 to be a bad credit score. A score of 620 to 640 is acceptable, but the best interest rates go to borrowers with scores over 640. The Federal Housing Administration, which insures mortgages for people with limited incomes and credit, will accept FICO scores as low as 580.
- For borrowing other than to finance a home, a FICO score of less than 620 is termed "subprime" and is viewed by lenders as a bad credit score. This does not mean a person cannot get credit with these lower scores. Lenders in the subprime market (sometimes called nonconforming lenders) also use the credit score to assess how much risk a potential borrower poses. They charge higher interest to offset increased risk and may require more collateral to secure a loan. For someone with a very bad credit score (well below 620), the only option may be to start rebuilding credit with a secured credit card. The borrower deposits enough money to cover the amount of credit extended, and the credit limit is gradually increased if payments are made on time. Credit accounts of this type charge high fees and interest but can be a way of starting over.
- There are several components of the FICO score. If someone has a bad credit score, she can improve it by addressing each one. The most important is to pay bills on time. It's especially important not to let a payment be more than 30 days late. If a borrower has too much debt for her income level, this also hurts her credit score. Paying down debts helps, especially short-term debts like credit card balances. A bad credit score can be improved further if a person asks credit card issuers to lower her credit limits as she pays off balances. That's because there's less "on-demand" credit available that a borrower might use. Finally, frequently opening or closing credit accounts should be avoided.
- There are other steps that can be taken to prevent or improve a bad credit score. Preventative steps include avoiding tax liens or having a debt go to a collection agency or to court. A foreclosure or bankruptcy stays on a person's credit history for years and should be avoided if possible. If a person runs into financial problems, the key to preventing a bad credit score is to work with lenders. They want to get their money back, and if someone shows he is making a good-faith effort to pay off his debts, most lenders will work with him. Another strategy is to get a bill consolidation loan that lowers monthly payments (and often interest rates). This not only lowers a person's total debt over time, it makes it easier to make timely payments.
Comments
lawrencebussani said
on 12/19/2009 Great article 5 start for that information
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