Credit Scoring

Credit scores are algorithms that evaluate your history of payment and your ability to pay debt obligations in a reliable way. The Fair and Accurate Credit Transactions Act (formed in 2003) defines a credit score as:“A numerical value or a categorization derived from a statistical tool or modeling system used by a person who makes or arranges a loan to predict the likelihood of certain credit behaviors, including default (and the numerical value or the categorization derived from such analysis may also be referred to as a ‘risk predictor’ or risk score)”.

How Credit Limit Affects Your Credit Score

The purpose of calculating credit scores is obviously to gauge the credibility of loan applicants based on their credit histories. A study of your credit history portrays the probability of you repaying any balance due on your accounts. A history of payment of bills, lines of credit from various creditors, the balance of debt on various accounts and the number and type of credit accounts that you have are some of the basic factors that determine your credit score – along with its variation and deviation from your available credit limit. In a nutshell, if you have large account balances and use most of your available credit, and you have a lot of accounts, your credit score will likely go down.The credit limit is the upper limit of money that you can obtain (you should not go anywhere near this amount to maintain a good credit score). This amount is supposed to be repaid to the creditor within a predetermined time frame, usually 30 days.

Like it or not, your credit limit also reflects your income, assets and debts.

The Equal Credit Opportunity Act (ECOP) restricts a creditor from generating biased credit scores based on the gender, racial identity, color of skin, status, place and region of origin and other such sociological factors of a consumer. If you are denied credit, the creditor has to state explicitly the grounds for the denial. If you feel that you have been denied credit on a basis other than your credit score, you can and should file a complaint with the Federal Trade Commission (FTC) and the Attorney General in your state.

Positive Credit Scores

It is important to note that credit scores also reflect positive consumer behaviors on the credit report. Timely payment of bills, maintaining a flawless credit record and staying well below your credit limits will ensure that you obtain and keep a good credit score. Generally, good credit scores are in the 640+ range, although this varies with different lenders.

Timely payment of bills does not imply using the maximum available credit balance every month and paying only the minimum amount due each month. Such practices can actually result in your credit score falling, as lenders feel that you may be using all of your available credit due to an unstable financial situation.