Credit reports, credit scores or credit rating, however you call it, credit has become an important part of life for everybody out there. Whether you are borrowing money or have a huge chunk of cash stashed away in a Swiss account, your credit report matters. Your credit score is needed for everything from buying a house to buying shoes. In fact, the importance of credit has never been this big had the recession never impacted majority of households who were borrowers. Today, every agency that you seek finance from will have strict lending standards. In other words, the days of easy credit given to anyone that can breathe air are long gone.
Your credit score will determine your worthiness, not just in the eyes of your lender but landlord, employer, stores, car dealers and utility providers as well. This score will determine whether or not the lender trusts you to pay back the borrowed money on time. It is a complex formula, one that most people don’t understand or haven’t attempted to understand even after many years of borrowing. This formula will come up with a number that will tell the lender the amount of money they can risk lending, and what interest rate you will be charged. The better the score, the more money you can borrow and the lower interest rate you will pay.
Unless you have been living under the rocks, finance companies such as banks and credit unions ask for your credit score before doing any type of business with you. Even if you never used a credit card or never borrowed any money before, this score is important to them. It used to be a secret peephole into your financial life, not anymore. Today, everyone, from bank official that you talked to when consolidating debt to checkout cashier that processed your $25 off discount after signing you up for a store card, knows that number, sometimes more than what you know. And they are stored everywhere, not just the credit report you obtain from the official agencies like Experian, Equifax or TransUnion.
Basically, your credit report will work like this. Companies that you have borrowed money from report to the credit agency your financial activities – whether you have paid bills on time, paid interest on mortgage as specified, borrowed additional fund and so on. They will report the good stuff, like car payment that is being made within a given time-frame as well as the bad stuff, where you failed to pay your credit balance before the due date. The agency will then feed these data to the complex algorithm that generates point values and ultimately your score. Your future borrowing ability, the way you are treated at the bank, the rate of interest you will qualify for – all of these and more will depend on that magic number.
People are often surprised and confused of their credit score. Someone who earns a million dollar a year may have a bad credit score than someone who lives paycheck to paycheck. Sometimes, even if you are paying off the bills on time and have never missed a single payment, your credit score will still be low. So, what does it take to increase your credit score? Surely, it is not the income you earn, nor the loyalty you have with your credit card company. So, what is it? Again, this topic is complex and never been touched upon by many consumers and advisers alike.
Nevertheless, one thing is true at all times – your credit score plays a crucial role in your financial life whether or not you borrow money. Paying attention to this score regularly is equally important and for many reasons. For one thing, your score will tell the lenders whether they can trust you to pay off their money. Even if you are a person of integrity holding high moral values, they will only look at your score when lending. Second, keeping an eye out on the credit report will let you catch identity thefts, fraudulent activities or errors early on. It is not that you cannot recoup your money, but cleaning up the mess made by thefts can cost you a lot of time and patience.
If you have been a credit card customer for sometime now, say for more than a decade, your credit report will look like an episode from the history book. It will give you a flashback of your financial memories, where you have been and how far you have come along lately. This report will show the addresses that you once rented, the cars that you once owned and all the late payments you made when you were going through a rough patch in life. Reading the report is important for many reasons. For example, if you happen to find a serious mistake, like the address of a friend listed on your account, you can dispute it by following the instructions online. If you happen to come across negative information that you know is incorrect, the faster you dispute, the better the outcome will be. Remember that most negative information have an expiry date unless it is bankruptcy filing. A bankruptcy will stay on your report for at least 10 years.
Like mentioned earlier, the exact formula for computing your FICO score is a secret. However, it will be helpful to know some of the factors that may increase or decrease your score. For example, the longer your credit history, the bigger the number. Paying bills on time obviously will improve your score, so does paying loans. Applying for more than one or two credit cards, on the other hand, will lower your score. It will trigger inquiries, which is an indication that you are overspending. Opening and closing credit card accounts frequently can lower the score as well. A person with a lousy score may end up paying a significant amount of money in interest compared to someone who has a good or excellent score.