If you've ever wondered why a lender made a credit determination, then you aren't alone. Creditors use credit scores to make a host of important decisions, and they're mostly looking to assess risk. Will you pay your credit cards, auto loan, or your home loan? Even non-creditors are using credit scores to assess customers. Chief among these companies are those in the insurance industry, where insurance providers use your credit score to decide whether you are an acceptable risk. The higher your score, the lower your risk, and you'll be more likely to get insurance if you have a clean history. Perhaps more importantly, you will pay lower premiums. 

How does credit scoring work?

Credit scoring is something that's useful for creditors who want to assess risk. It can come from one of three credit reporting agencies, and it contains much information about you. 

There are many things on your credit report. Your bill payment history, your account information, and your timeliness are all very important. Likewise, the total age of your accounts, any public judgments, and any collections accounts will be reflected in your report. Many creditors take your information and compare it to similar consumers with similar credit histories. They can then conceivably make good decisions on whether not you are an acceptable risk. At the end of the process, your credit worthiness if drilled down into one number. That's your credit score. 

One of the emerging trends in the insurance industry is the use of credit reports to figure out whether a person will file a claim. Though insurance providers use a number of different factors to make their decisions, they can learn a lot about a consumer by viewing that consumer's credit report. It is worth knowing that insurance companies don't use the same reports that a bank might use. They use credit reports especially geared toward the insurance industry. 

The importance of accurate information
Because of the importance of your credit report, you must ensure that the information held there is completely accurate. There are many protections in federal law that allow you some peace of mind. The most important of these is the ability to pull your credit report for free once per year. This free copy can keep you up to date on the things that are being reported under your name. 

You should know that your free credit report will not include your credit score. The law does require credit bureaus to provide you with your score on demand. You will have to pa, though, and the fee is generally somewhere in the eight dollar range. 

There are many ways to get your free credit report each year. Perhaps the easiest and most efficient is by visiting 

How do credit scoring systems work?
Credit scoring systems are developed by both creditors and insurance providers. These companies often select a sampling of consumers to analyze their similar characteristics. The idea is to identify those factors that lead to higher risk. If the insurance company or creditor can identify things that make a person a riskier proposition, then they can more effectively allocate that risk. The companies use statistics to weight the individual factors that predict riskiness. They can then put together a comprehensive scoring model to compare various applicants for loans or insurance. 

The Equal Credit Opportunity Act is a federal law that requires things of creditors when they put together scoring models. They cannot, for instance, use race, sex, national origin, or other protected factors in contemplating risk. Creditors can use age, however, as a factor that predicts risk. 

Improving your credit score
Because of the complex nature of scoring systems, there is no one easy way to bring up your score. In order to improve your score, you need to improve factors compared to similar consumers in the marketplace. Because this is a sliding scale, your score may move up and down in a way that seems incompatible with the actual changes to your report. This is the nature of the beast, and consumers must accept that they have limited control over how these things play out. 

With that said, there are a few different specific things that you can do to improve your score. Here are some questions to consider. 

Did you pay your bills on time? 
If you want to raise your score, keep your accounts current. Your score will reflect any late payments or referrals to collection agencies. These things can sink your score for an extended period of time. 

Have you maxed out your cards? 
One of the most important factors in your credit report is your available credit ratio. It is important that you not use more than 30-percent of your available credit at any one time. When you max out your cards, you appear to be much riskier, and this will raise your credit score when you are compared to consumers who haven't maxed their cards. 

How long have you maintained credit accounts?
The majority of scoring models take average account age into the prospectus. The longer you have held accounts, the better you will be. This is why it is important not to close those old accounts, even if you aren't using those cards. 

Have you applied for many cards or loans?
Credit scoring systems take into account the recent inquiries on your record. If you have been applying for many loans, your score will go down for a few months. People who apply for lots of credit in a short time are seen as riskier by the creditors and insurance companies. After a period of not applying for new loans, your score should return to its normal levels. 

When credit models consider "other" factors
It is important to know that your credit scoring model might include more than just the information that shows up in a traditional credit report. People applying for a mortgage, for instance, might have their down payment amount taken into account. Their income level and job security might also go into that risk prospectus. 

Having patience when improving your credit
One thing to remember is that it will be very difficult to change your financial past overnight. After all, it is highly likely that you did not build your credit history overnight. You will need to focus on paying down your accounts on time and making progress on all debts. The longer you do this, the better off your score will be. Quick fixes rarely work, and this is especially true in the financial realm. 

Do we know if credit scoring systems work?
If you're struggling to put in the hard work to bring your credit score up, you might take the approach of criticizing the credit system altogether. Do credit scoring systems even provide insurance companies and creditors with useful information? The truth is that this depends upon a number of factors. Speaking from a purely statistical standpoint, these systems are only useful when they have a large enough pool of applicants to provide meaningful data. Most of the large creditors and insurance companies have enough data to pull a meaningful sample size. 

Systems are highly useful in one important way. They take the guess work out of making financial decisions. They streamline the process, making it much more efficient and fair overall. This is a great way to take the human element out of the credit decision process, and this can have its benefits for companies looking to make important decisions. 

Is there anything that you can do when you are denied credit?
When you are denied, you have some rights under federal law. Creditors must furnish you with the reasons why they turned you down. They cannot simply tell you that your credit wasn't good enough, either. They must provide a specific and tangible reason why your application was dinged. 

Even when you are given a higher rate or premium as a result of information in your report, the creditor or insurance company must give you the name of the credit reporting bureau that provided the report. This gives you an opportunity to find out what the report said about you and your history. If false information led to the higher rate, then the creditor must respond to this information. 

If you happen to be denied credit or given a bad rate on the basis of your poor history, then you have some options. You can first try contacting the credit reporting agency to make sure that the information is accurate. If all of the information is current, then you might act to bring up your credit score. This could include paying down some debt or making a few months worth of consistent payments. In addition, you might take the opportunity to apply for different sorts of loans. Some creditors work specifically with people who are trying to re-build their credit, and many insurance companies are willing to provide low rates for people in this precarious position. The key is to keep your options open.