How Does a Credit Score Work ?
A credit score is a rating system that is used to determine whether or not to lend you money, and if so on what terms and conditions. Some of the most common questions are :
A credit score is the one real determinant that applies to most auto credit, whether it be a loan for a new or used car or a lease agreement with one of the main manufacturers. Anyone applying for auto credit will need to go through an application process, the end result of which is a credit score that determines both whether or not the loan is approved, and if so what terms and conditions.
One of the reasons it is important to understand both what a credit report and a credit score is, is that it is possible to do a number of things to improve both the credit report and consequently the credit score, and thus make obtaining a loan or getting better terms and conditions much more likely.
Credit Score – Application Process
Anyone applying for any type of auto credit will need to fill out a fairly detailed application form, either online or more traditionally in paper form. The application form will require a significant amount of personal and financial information about individual, possibly their family and possibly their business associates before loan is in any part for a commercial vehicle or enterprise. The information required will normally relate to items such as the individual’s name, their date of birth, their current and previous addresses, their current telephone numbers and email addresses.
More sensitive information will also be required such as their Social Security number or their social insurance number, their drivers license number and possibly a copy thereof and possibly their passport as well. Their current and previous employers details will also be needed, both to verify their employment status and give some indication of stability regarding work. If self-employed, then either a number of years worth of accounts or some statement from the accountant will be needed to verify their financial position.
Credit Score – Credit History
Once the application process has been done, the application form will be forwarded to one of the major credit rating agencies, who will compile what is known as a credit report. This is a mix of the parcel information in the application form and a summary of the credit history of the individual. The credit history of the individual moment refers or contains information regarding the following areas. Information that is in the sense of public record such as bankruptcies, as well as information that is essentially private such as their banking records, overdrafts and closed accounts.
The credit history will look for areas such as bounced checks, what lines of credit there have been and how they have been used, current and previous loans and mortgages and how they have been managed. Items such as credit cards and store cards will also be looked at both for any sign of late payments or defaults, or how the credit has been managed. One big warning flag is the issue of pay day loans.
Credit Score – Credit Report
Once all this information has been collected, it is compiled into what is known as a credit report. This credit report is then used to produce what is known as a credit score. Essentially what happens, is that the individual is allocated a number set within a sliding scale of two of the numbers. The standard example or is given is the individual being allocated a number of 350 between a sliding scale of zero and 700. This credit score is then used by the credit rating agency, by the main dealerships and any bank or finance house as a way of determining whether or not to blame the individual any money.
Also to determine the terms and conditions including the size of any down payment that may be deemed applicable to the loan. In essence the credit report will compile information that gives the credit rating agency sense of how the individual managers their money. With regard to credit this will essentially summarise their payment history of credit, their use of available credit, the length of their credit history, the various types of credit they have used and whether they have continually tried to obtain different methods of credit and with what degree of success.
Credit Score – Bad Credit
Many people have what they believe to be a pall of a bad credit score which they believe reflects the ability to obtain any type of credit loan. The first thing to do is to obtain a copy of your credit report, which can easily be done either on-line or through a number of local agencies. Bear in mind that this should be free, and should not be tied to any request for money for any other service. Once you have obtained your credit report you can check it to make sure that the information in it is accurate and up-to-date. Depending upon where you live, there are normally legal requirements as to how long certain items such as bankruptcies can be included in a credit report.
This means that there is a time limit as to how long they can effect your credit score. If these items are still being included you can demand that they be removed.There are potentially other ways to improve your credit, either by way of paying off certain outstanding debts, or by managing things such as credit cards in different ways.
Credit Score – No Credit
There are certain people who simply do not have any credit history, either because they have never had any need to obtain credit cards or loans, or because they are too young to have built up any sources of credit themselves. Sometimes, in the event of an auto credit loans that will be a requirement for a cosigner to effectively guarantee the loan. This is normally a parent or a Guardian, although it could be an employer as well. This can sometimes be quite a good way of building up a degree of credit, although it also carries a high degree of risk for the cosigner themselves if the individual falls behind with payments or defaults on the loan.