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The four C's of Credit

Credit Reports

Correcting Errors on Your Credit Report

Credit Scoring

Improving Your Credit Score

The Four C's of Credit

How does a lender determine if you qualify for a loan? Methods may vary, and there is always flexibility allowed, but there are industry guidelines that most lenders follow. The lender must feel confident that you can and will repay the loan. The information you provide on your loan application is judged, in general, by the Four C's of Credit -- your credit history, capacity, collateral and capital.

Credit History

Your credit history consists of your frequency of obtaining credit, amount of your debt and whether or not you pay your bills on time. Lenders use credit reporting agencies to verify your credit history. Do you know what your credit history is according to these credit bureaus? They are not fool proof. For a credit report click here.

Credit Capacity

Your occupation and sources of income are weighed against your expenses - number of dependents, living expenses (mortgage/rent, utilities, etc.) and other debt obligations. This tells the lender whether or not you live within your means and can afford to repay the loan. As a general rule of thumb is that your monthly debts do not exceed 36 percent of your gross monthly income.

Collateral

Lenders often want collateral as protection in the event you fail to repay the loan. Often the collateral used is the product (car, home, etc.) that you are purchasing with the money you are borrowing. Collateral often influences the interest rates you will be charged. Because of the tax advantages, many use their homes or owned real estate property as collateral for such purposes as to obtain loans for cars or debt consolidation.

Capital

Do you have enough cash for the down payment (and for real estate, closing costs)? Will you have a cushion left after your purchase? If you will need a gift from a relative for the down payment on a home purchase the lender may ask for a notarized gift letter.

Credit Reports

Your credit payment history is recorded in a file or report. These files or reports are maintained and sold by "consumer reporting agencies" (CRAs).

One type of CRA is commonly known as a credit bureau. You have a credit record on file at a credit bureau if you have ever applied for a credit or charge account, a personal loan, insurance, or a job.

Your credit record contains information about your income, debts, and credit payment history. It also indicates whether you have been sued, arrested, or have filed for bankruptcy.

There are three major credit bureaus in the United States. They are Experian, Equifax and Trans Union. These are actually three separate companies and may have different information on you in their files. Therefore, to get a complete picture of your credit status, you will need reports from all three of these companies. You can get your Get Your Free Credit Report and Score! by clicking the words. you may be surprised to find several mistakes in one or more of these reports. This is very common. For instance, you may find someone else's negative information in your file whose name is similar to yours. Small errors like this can negatively affect your credit for years unless you take action. 

Correcting Errors on Your Credit Report

Fortunately, by law, credit agencies must prove the accuracy of any negative items within 30 days of receiving your letter of dispute. If they can't, they must erase the negative item! This is how the so-called "credit repair" companies are able to make their money. They know that most of the time, the original creditor may be too busy or not care enough to respond to the credit agency. And if they don't respond in 30 days, then you win, and the items are removed from your credit report. 

Under the Fair Credit Reporting Act, both the credit bureau and the organization that provided the information to them, such as a bank or credit card company, have responsibilities for correcting inaccurate or incomplete information in your report. 

First Get Your Free Credit Report and Score!,then tell the credit bureau in writing what information you believe is inaccurate. In addition to providing your complete name and address, your letter should clearly identify each item in your report you dispute, state the facts and explain why you dispute the information, and request deletion or correction.  The reason can be as simple as "this credit card is not mine." You may want to enclose a copy of your report with the items in question circled. Send your letter by certified mail, return receipt requested, so you can document what the credit bureau received. Keep copies of your dispute letter and enclosures.

• Disputed information that cannot be verified within 30 days must be deleted from your file.

• If your report contains erroneous information, the credit bureau must correct it.

• If an item is incomplete, the credit bureau must complete it. For example, if your file showed that you were late making payments, but failed to show that you were no longer delinquent, the credit bureau must show that you're current.

• If your file shows an account that belongs only to another person, the credit bureau must delete it.

When the reinvestigation is complete, the credit bureau must give you the written results and a free copy of your report if the dispute results in a change. If an item is changed or removed, the credit bureau cannot put the disputed information back in your file unless the information provider verifies its accuracy and completeness, and the credit bureau gives you a written notice that includes the name, address, and phone number of the provider.

Also, if you request, the credit bureau must send notices of corrections to anyone who received your report in the past six months. Job applicants can have a corrected copy of their report sent to anyone who received a copy during the past two years for employment purposes. If a reinvestigation does not resolve your dispute, ask the credit bureau to include your statement of the dispute in your file and in future reports.

If the item is still not corrected after working with the credit bureau then tell the creditor or other information provider in writing that you dispute an item. Include copies (NOT originals) of documents that support your position. Many providers specify an address for disputes. If the provider then reports the item to any credit bureau, it must include a notice of your dispute. In addition, if you are correct—that is, if the disputed information is not accurate—the information provider may not use it again.

Credit Scoring

Credit scoring is a system creditors use to help determine whether to give you credit.

Information about you and your credit experiences, such as your bill-paying history, the number and type of accounts you have, late payments, collection actions, outstanding debt, and the age of your accounts, is collected from your credit application and your credit report.

Using a statistical program, creditors compare this information to the credit performance of consumers with similar profiles. A credit scoring system awards points for each factor that helps predict who is most likely to repay a debt. A total number of points—a credit score—helps predict how creditworthy you are, that is, how likely it is that you will repay a loan and make the payments when due.

Why is credit scoring used?

Credit scoring is based on real data and statistics, so it usually is more reliable than subjective or judgmental methods. It treats all applicants objectively. Judgmental methods typically rely on criteria that are not systematically tested and can vary when applied by different individuals.

How is credit scoring model developed?

To develop a model, a creditor selects a random sample of its customers, or a sample of similar customers if their sample is not large enough, and analyzes it statistically to identify characteristics that relate to creditworthiness. Then, each of these factors is assigned a weight based on how strong a predictor it is of who would be a good credit risk. Each creditor may use its own credit scoring model, different scoring models for different types of credit, or a generic model developed by a credit scoring company.

Improving Your Credit Score

Credit scoring models are complex and often vary among creditors and for different types of credit. If one factor changes, your score may change—but improvement generally depends on how that factor relates to other factors considered by the model. Only the creditor can explain what might improve your score under the particular model used to evaluate your credit application. Nevertheless, scoring models generally evaluate the following types of information in your credit report:

• Have you paid your bills on time? Payment history typically is a significant factor. It is likely that your score will be affected negatively if you have paid bills late, had an account referred to collections, or declared bankruptcy, if that history is reflected on your credit report.

• What is your outstanding debt? Many scoring models evaluate the amount of debt you have compared to your credit limits. If the amount you owe is close to your credit limit, that will have a negative effect on your score.

• How long is your credit history? Generally, models consider the length of your credit track record. An insufficient credit history may have an effect on your score, but that can be offset by other factors, such as timely payments and low balances.

• Have you applied for new credit recently? Many scoring models consider whether you have applied for credit recently by looking at "inquiries" on your credit report when you apply for credit. If you have applied for too many new accounts recently, that will negatively affect your score. However, not all inquiries are counted. Inquiries by creditors who are monitoring your account or looking at credit reports to make "prescreened" credit offers are not counted.

• How many and what types of credit accounts do you have? Although it is generally good to have established credit accounts, too many credit card accounts may have a negative effect on your score. In addition, many models consider the type of credit accounts you have. For example, under some scoring models, loans from finance companies may negatively affect your credit score.

Scoring models may be based on more than just information in your credit report. For example, the model may consider information from your credit application as well: your job or occupation, length of employment, or whether you own a home.

To improve your credit score under most models, concentrate on paying your bills on time, paying down outstanding balances, and not taking on new debt. It’s likely to take some time to improve your score significantly. Also try to remove any negative items as instructed above in Correcting Errors on Your Credit Report.

Sometimes correcting our own credit report is more then most people can handle, so there are companies that will help you make the process easier click here for one of the most reliable firms in the country to help  Repair Your Credit.

Your loan application and your credit report are the two most important documents that lenders use to determine your suitability for a particular loan. To get the best possible loan at the lowest cost, you should make sure that the information in these documents reflects all of your strengths as an applicant.

Here are some tips that can help

Minimize your debt. Lenders look very carefully at your existing debts before they decide whether or not to give you a new loan. You should always be careful about how much debt you accumulate, and in the time leading up to your application, you should try to minimize your debt. Keep your credit card balances low, for example -- or pay them off completely if you can. Lenders need to know that you can live within your means.

Check your credit report. Your credit history is another important factor that lender's consider when they evaluate your suitability for a loan. And your credit report is the only version of that history that lenders have. Request a copy of your credit report and be sure that it is accurate.