Understanding Your Credit Score. What does your credit score really mean?

According to Investopedia, your credit score is: "A statistically derived numeric expression of a person's creditworthiness that is used by lenders to access the likelihood that a person will repay his or her debts."  Unfortunately, many people look at their credit score as a mark of their self worth.  Here are some interesting facts that breakdown the different ways credit scoring agencies determine how you manage your finances. Credit scores are typically:

• Sourced from the credit bureaus;
• Based on the information in your credit report;
• Each bureau derives its own score.

Credit scores are mainly used by lenders (such as credit card companies and banks) to:

• Evaluate the likely risk of lending you further money;
• To determine what interest rate to charge to mitigate losses;
• What credit limits should be established;
• To determine which customers are likely to bring in the most revenue.

Would it surprise you to know that raw income or length of employment is not considered by the major credit bureaus when calculating a credit score?  The score simply looks at your leverage or debt-to-income ratio.  The traditional credit scoring system mainly evaluates how you have handled past debt.  The credit scoring system does not factor how you will handle future debt if you currently have no debt, nor will the system take into consideration recent changes in circumstances that will improve your ability to take on new debt. In the last decade, new systems for determining creditworthiness have been developed from companies such as Scorelogix, Innovis PRBC and LSC.  These companies do not use credit bureau data to predict your ability repay your debts.  For instance, Scorelogix's JSS credit score uses an alternative set of risk factors, such as:

• Your job stability;
• Income and income stability;
• Income sufficiency;
• Impact of economy.

The use of these alternative credit scores are on the rise. Most often, they are combined with FICO or other bureau scores to improve the accuracy of predictions and create a better insight into the borrower's ability to pay.  It is widely accepted that FICO is a measure of your past ability to pay, that's why new credit scores that focus more on your future ability to pay are being deployed to enhance credit risk models.  Experts project that FICO will remain the dominant score, but FICO will likely be used in combination with other alternative credit scores that offer new layers of risk insights. So what is the bottom line of all this?  You can't change the past, but you can change the future.  If you have made past financial mistakes, make sure you are poised not to repeat them.  If you haven't dealt with your debt, there is no time like the present to reorganize or eliminate debt that may be weighing you or your credit down to create a more positive financial future.  Call us today at 866-261-8282 for a free consultation to discuss your debt resolution options.  We help clients find financial freedom through Chapter 13 debt consolidation, Chapter 7 debt elimination and non-bankruptcy Debt Settlement.