Your Credit Score

Your credit score is made up of varying parameters in your credit file, including length of credit history, number of open accounts, loans, mortgages, public records, and others are formulated to produce a three-digit score between about 300 and 850. Usually a lender will use a combination of your credit score with other factors when determining the bottom line: a borrower's potential risk.

Negative Items are the black marks on your credit report that can hurt your credit score.

Negative items can include:

• Late payments
• Judgments
• Tax Liens
• Collections
• Bankruptcies, etc.

Your score determines not only if a lender is willing to lend you money, but your interest rate as well. Even a few points up or down on your credit score can significantly affect the interest rates lenders will offer you and a single percentage point on a large loan such as a home mortgage can end up costing you thousands of dollars over the life of the loan.

How much is bad credit costing you? Click here and find out.

The problem with credit scores

The purpose of a credit score is to take all the information in your credit report and create a single number that is an accurate depiction of your credit risk. Lenders are then able to use this number when deciding whether or not to lend you money and what interest rate they will require.

There are two main problems with the way your credit scores are calculated. First, credit scores are calculated using the information in your credit reports and for most people, this information is not accurate or is not truly indicative of their credit worthiness. It makes no difference how accurate the credit scoring model is when the information used to create your credit score is not accurate. As a result, many people have unfairly low credit scores because of the information in their credit reports.

The second problem with today's credit scoring models is that they appear to exhibit a significant bias in favor of banks and other lenders. This leads to people having lower credit scores than they deserve - credit scores that force them to pay higher interest payments in spite of their relatively high credit worthiness.

Perhaps the strongest example of this bias is the fact that for years, information on your credit reports up to seven years old was factored into your credit scores even though it has been shown that information over two years old is no longer an accurate predictor of credit risk. This information caused people who had years of perfect credit utilization to have a lower credit score and resulted in larger profits for lenders.

Even when the credit bureaus themselves made an attempt to fix this oversight in the traditional FICO® based scoring models by launching the VantageScore credit scoring formula, lenders balked at the idea of using what the credit bureaus believed to be a more accurate credit score with the benefit of providing consistency across all three major credit bureaus. After all, what is the incentive for lenders to switch to a credit scoring model that no longer allows them to charge people with a low credit risk an unfairly high interest rate?

A big reason lenders give for not migrating to the VantageScore is concerns about the "predictiveness" of the new scoring model, but it is interesting to point out that lenders seem to have little problem when changes in the FICO® model adjust credit scores in their favor. For example, many people were using and is some cases exploiting the authorized user loophole in the model. This involved adding someone with poor credit or a thin credit file as an authorized user on an established credit account in order to increase their credit score. The practice was considered to be solid advice for parents looking to help their children start building their credit but it was also abused by some shady "credit repair" companies. As a result, recent changes in the FICO® scoring model are eliminating the benefit of being listed as an authorized user which protects lenders against "seasoned tradelines" providers, but also lowers the credit scores of millions of people. While this change may or may not increase the predictiveness of the credit scoring model, it is interesting that lenders have no objections to changing the model when it benefits them.

What can you do about your credit score

Unfortunately, there is nothing you can do about the credit scoring model other than write your Congressional representative in an attempt to get them to take action on your behalf. The credit scoring model is and always has been biased against you. As long as lenders with deep pockets benefit from keeping your credit scores down, the credit scoring models will continue to work against you.

What you can do, however, is work to manage the information that is used to create your credit scores. The single best way you can do this is to dispute any information on your credit reports that is not an accurate indicator of your true credit worthiness. Lexington Law has helped thousands of clients like you take control of their credit by legally disputing the questionable negative items in their credit reports and these efforts have resulted in the removal of millions of negative items from client's credit reports so far.