You’ve probably never heard people talking about their credit scores to others. Just like a social security number, your credit score is one of the most important metrics that you have to maintain in order to open up more financial options for you. Learning about it is your responsibility as a citizen and maintaining it is your privilege.
What is a Credit Score?
In its full essence, your credit score is a measurement of your financial capacity to pay off a loan. Lenders from banks, credit card companies and even government agencies use this score to determine how credit-worthy someone is before they award someone any credit. This score is reported in the form of a number between 300 and 800. As you might have guessed, the higher the score, the better the status. Ideally, everyone would want a high score. That is found in between 700 and 850. If your score falls in this range, that means you present a low risk for creditors because of your good payment history and high creditworthiness. If your score falls between 600 below, that means you’re a high risk. But this wasn’t always the case a long time ago. Before the inception of this system, lenders and banks in the 1980’s had to rely on their experiences in the industry to judge if lending a particular consumer money was good enough for it. This caused a myriad of problems that stemmed from human error.
When the time came that the losses in the industry were too high due to failure of payments, an organized system was constructed in order to protect lenders and provide consumers with an accurate idea of where they stand in terms of credibility. And although this seems a little demeaning to compare people to a mere number, this system has allowed both lenders and borrowers to review their chances before they make a financial decision. Creditors had the chance to screen their applicants while consumers had the chance to improve their score using the system. As of today, many countries use this standardized system to review their applicants such as the United States, the United Kingdom and Japan.
But your credit score doesn’t just affect your chances of getting a loan or credit. This scare is also used to determine a suitable interest rates for loans. If you have a good enough credit score, lower interest rates are afforded for you because of your standing. Likewise, if your credit score is low, not only will you have trouble getting approved for a loan, you’ll also be given higher interest rates so that you’d be “encouraged” to immediately settle your balances. This is why it is important to keep track of your score. But doing so isn’t as easy as always paying your loans on time. It pays to understand where your score comes from and what factors affect its growth or declines. And the first place to look for answers is at your credit report.
What is a Credit Report?
In line with your credit score, your credit report is a compilation of all things related to your financial background along with some basic personal identifying information about yourself. When a creditor needs to obtain someone’s score, they contact organizations known as credit bureaus or credit reporting agencies. These agencies then and pull up your records to determine your score. By this definition, it is important to understand that your credit score is a separate entity from your credit report. While a credit report is a collection of your history and actions with money, your credit score is merely an interpretation of this history illustrated in the form of a numerical value. In line with that, creditors may use just your Credit score or may even use both your score and your report to assess if you’re good enough for a loan. It depends on their screening process. The various financial institutions you deal with do business with these organizations to help protect them from poor lending habits. In the United States, there are three Credit Reporting organizations that sculpted their business model on credit scores. These are Equifax, Experian, and TransUnion. Banks, lending institutions and other creditors do business with these agencies via requests of credit scores. As a consumer, you also have access to these reports. They are also up for contention if you feel that something is amiss with the way your data is treated.
Part of the things that make up your credit report is a record of all your loans, mortgages and payments. These details will also include which balances were settled on time and which ones came overdue. These overdue balances are even segregated based on how long they’ve been overdue until the moment that they have been absolved or settled. When you’re able to keep a good payment record on your loans and balances over a long period of time, that contributes positively to your score. That means you’re punctual with your payments and plenty of creditors would love to give you more loans and credits for you to use. Apart from your actions, your age in the financial industry is also accounted for in your credit report. It would be unfair if all consumers were graded on the same bases. That would mean a fresh, new borrower would be the same as an excellent borrower who has worked hard to maintain their good credit score. This is why credit reporting agencies compare scores of people who share the same length of financial history. You are graded in comparison to how well other people have fared who are just as “financially young” as you are.
On the other hand, if you have a poor payment history, creditors will see you as a liability that might cost them more money than they invested in you in the first place. This is especially true if you’ve had any balances that have gone into collections. When a loan comes into collections that means your payments have become so overdue that your creditor has resolved invest more money in a collection service agency to recover the debt you’ve made from them. Have you ever been pestered over the phone by agents reminding you about your balances, those are collections agents who are called when you’ve gone long overdue. And when a collections agency becomes involved, rest assured that your overdue payments have also been reported to the credit reporting agencies, severely pulling your score down.
Depending on the places where you do business, your actions may end up getting reported or not to the various credit score agencies. Some companies or banks choose not to report petty late payments or unpaid fees that you might have forgotten. On the other hand, there are also companies that make it a point to be as transparent as possible, reporting every single payment you’ve made, whether it’s on time or late by a day. This is why phone, internet and even cable TV subscribers always ask about their service provider’s credit reporting habits before signing up with them. Creditors use these as risk factors in order to see if you have a history of missing your payments or if you have erratic spending habits. Ideally, you would want to present yourself as someone who isn’t a high risk. That would mean creditors can entrust you with higher credit and more benefits.
What are Credit Scores Used For and Why are Credit Scores Important?
Fortunately, the answer to both of these questions are the same. Credit Scores are important exactly because of what they’re used for.
Primarily, Credit scores are used to approve loans such as mortgages and car loans. As mentioned earlier, you can also get these loans at lower rates if you show yourself to be a low risk with a high credit score. If you have a good enough score, the loan is given to you. If not, you might end up being advised as to how to improve your score in order to get the loan approved. If in the case that your initial application did not pull through, going to a different lender or company isn’t going to be any easy nor will your chances improve. This is because your score stays with you wherever you go. That means the next creditor will be looking at the same score even if they’re in a different state or locality. You scores are also used for various services that require monthly payments like phone lines, cable TV services and internet services as well. Service providers also do business with credit reporting agencies before approving these applications.
But credit scores aren’t just used for loans and subscriptions. Apartment rentals and even job applications sometimes require a review of your credit score. And in these cases, having a good score can actually save your life. This is because you’ll never know when you’ll be needing a loan. Emergencies can happen at any time. And if you’re caught flat-footed and a little short on finances, a good credit score can make it easy for you to obtain loans or apply for jobs when you need them the most. On top of that, today’s economy is growing into a credit-based environment. People are now carrying cards in their wallets instead of actual money. Everyone’s wealth is now going into banks where their money is safe. People are now buying appliances, vacations and even houses with credit cards instead of bank transfers. There’s a lot you can’t do without a credit card or a good credit score.
In addition to that, credit cards are starting to become the foremost choice when it comes to making payments. They’re used in almost every establishment. From your local coffee shop to the grocery store, people are now paying through their credit cards which give them benefits and bonuses as compared to paying with cash. And with a bad credit score, you’re missing out. Even professionals are beginning to carry portable card readers to help make their business more accessible to their consumers.
But finally, the most important thing you have to remember about your credit score is that it takes time to repair. If in the case you have a low score or you’ve been hit by a severe negative action, it could take you at least five years to repair the damage that’s been done to your credit score. So you may be looking at years of rejected loan applications before you can apply for another one. And if it’s hard to improve on a score, it’s unfortunately easy to ruin one as well. A few months of overdue payments are more than enough to negatively impact your score and pull it down by several hundreds. And when this happens, you might have to work on this setback for a few years to get your score back up.
What is My Credit Score and What is Good Credit Score?
You will almost always want to ask for your FICO score. Although it sounds like an acronym, FICO is the name of a company that deals in a concept known as “predictive analytics”. This is an approach that takes your current financial data and computes what your future financial actions will likely be in the future. Your FICO score is probably the most important reading you’ll get as far as credit scores go. This is because more than 85% of American businesses and banks deal with FICO scores more than any other type of credit score. It is important to remember that although FICO gives credit scores, it is not a credit reporting agency. It’s a separate business entity that provides other financial services to its clients. You can request a copy of your score from them as well, but it will come at a price. In fact, the most direct approach would be to contact these credit reporting agencies and request for your scores yourself. OF course, this will come at a price. You might also have to surrender your credit card information to these agencies so that they can pull up your data.
But there are more affordable solutions as of today. Instead of going to the agencies directly, some credit card companies afford their card owners regular credit score reports as part of their memberships. You can ask for this before signing up with a credit card company. There are also online subscriptions to websites that offer free reporting for their members as well. Another efficient and affordable way to check your scores is to go online. There are several internet sites that will allow you to request your scores for free. Some of these places are Credit Sesame, Quizle and Credit Karma. When you get your credit score, you’ll be given three ratings. Each of these ratings comes from the each of the different credit reporting agencies. The first thing you will notice is that these your score from each is different from the other. This is nothing to be worried about, though. Remember that each agency uses different measures to check your creditworthiness.
But in the case that the difference is very large, this might mean that one score might not have been updated as of the moment. You would need to contact the credit reporting agency to have them update your scores. The first thing you want to look at is the three digit number that represents your rating. As mentioned earlier, the higher the number, the better. And depending on where you get your report, you might find different values with little variations among each other. This is because different reporting agencies and sites use different computation methods to translate the data from your credit reports into your credit score. Depending on where you get your score, it will also come with comprehensive data about your credit report and other notable things that have contributed to the score that you’re seeing. You could have gone down several points because of a balance that went into collections. You could have pulled up a few points because of that payment you sent in early. Some scores and reports could pull these details to give you a better picture of your score. If in the case that your score is low, the next best thing to do is to look at your own finances. Have all your balances been paid off? Were all your payments on time? Did you change your buying behaviours? These things could have caused a negative change in your score. And if you think that there’s a problem, you can contact your creditor and have them correct the error or investigate.
Why You Need to Check Your Scores Regularly?
Unlike exams that you only take once, your Credit score is an ever-changing measure of your creditworthiness that is affected by all your financial actions. With that in mind, monitoring it on a regular basis only makes common sense. The first thing you accomplish by checking your credit score regularly is an update on your progress. You’ll know if your actions have improved your score or if they’ve pulled you down. You may also detect abnormalities within your score that could have been brought about by fraudulent activities. Other people could have been using your name to apply for loans you’ve never authorized. People could be taking out a mortgage with your credentials without you even knowing it. And looking at your credit score on a regular basis will help you catch anything out of the ordinary. You can also find errors in some reports that might have been made on your account. That seemingly missed payment due to a machine error from your bank might still show on your report, causing a dent in your score. You can find these anomalies and have them corrected if you check your score regularly. You can also check to see if your scores are regularly updated by the different credit reporting companies by regularly checking your credit score. By checking your score, you’ll also become accustomed to what actions help you and what actions don’t. Seeing your raw score is a good way to recall your actions during the past period that might have put a dent on your score.
In addition to that, it’s always a wise option to know where you stand. You will be able to approach lenders with confidence if you’re already aware of your score and its contents even before anyone requests to have it pulled up. On the other hand, you’ll also become aware that you need to start working on a low score long before you need to apply for any loans or credits. It’s always good to be prepared and informed. But you have to be careful about how regularly you check your scores. This isn’t some simple statistic that you could pull up every week without consequence. You can potentially hurt your score by requesting for it too often. The ideal time frame on which to do that is every 365 days. This is the ideal period of time long enough for you to see visible improvements in your score. It is also short enough for you to quickly detect anything that’s harming your score before it does any more damage.
In totality, your credit report is your representative to the financial world. You can have a million dollars in your bank account but still have a terrible credit score because of all the bill payments you’ve missed. This is because your credit score is not a measure of wealth, but of skill in handling the responsibility of credit that has been afforded to you by your creditors. And if you can take good care of your credit score today, your credit score will take good care of you tomorrow.