How Your Credit Score is Evaluated
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Learn
exactly
how creditors
evaluate you and
your credit level for
the FICO credit score
and credit report.
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Variety of Credit Factors
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Banks and credit card issuers consider a variety of
factors when you request an extension of credit. By
far, the most important factor is the Debt to Income
Ratio (DIR). |
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Debt Has a Special Meaning
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Debt, in this situation has a special meaning. It
includes all sources of potential credit, debt and
liabilities that are available to you. So for
example if you have a credit card with a $2,000
credit limit but usually carry only a $100 balance
month-to-month, creditors will use the $2,000 figure
as your debt on that credit card account, not your
actual debt of $100. |
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Too Much Debt
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Having too many credit cards that you don't use can
negatively affect your creditworthiness. Such items
as outstanding mortgage balances and school loans
are also included in your Debt calculations.
Contrary to popular belief, Stafford loans and other
government subsidized loans are included in your
Debt calculations. |
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Credit Worthiness
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In evaluating credit worthiness of a consumer, banks
and other creditors calculate your Income by
including all sources of income, including salaries,
bonuses, rental income (if you are a landlord for
instance) and benefits you receive from the
government. It is thus advantageous to provide your
creditors with verifiable information on all your
income sources. As an aside, income obtained by
illegal means cannot be considered by creditors in
calculations of your Income. |
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High Debt Ratio
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High Debt to Income Ratio is a warning sign to
creditors, and is a likely reason that your request
for extension of credit will be rejected, be it
credit card, mortgage or car loan. From the
viewpoint of banks, an optimal DIR is about 20-35%.
Surprisingly enough, a very low DIR may also cause
your application for credit to be rejected. In this
situation, your past credit history becomes very
important. What the banks want to know is why do you
have so little credit? Is it because you are a bad
credit risk or is it that you did not request credit
before. |
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Late Payments
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In evaluating your request for credit, creditors use
your credit profile (also known as credit history).
Aside from the items that were discussed above,
creditors pay great attention to whether you have
had a history of late payments. While it may seem to
be quite insignificant if you are late with your
payments, creditors have no way of knowing whether
it is a result of oversight or financial inability
to pay, and by default they make assumption that it
is the latter. |
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