Credit Score, Report, and Why It’s Important
Your credit history and credit report are the financial keys to unlock interest rates, home loans, and revolving credit. Your credit report is a history of all of your debts, assets, liabilities, and payment history that tells lenders your either low or high risk as a borrower. Nearly everyone, once they start building credit, has a credit record on file at a credit bureau. Each time you apply for a new loan, pay your bills on time, or pay off a loan, it adds to your credit history.
The credit score is determined by three distinct yet similar credit reporting agencies. Experian, Trans Union, and Equifax all have a credit scoring system that ranks a person’s credit from 300 to about 850. The higher the number, the better interest rates, better loan opportunities, and better terms the individual can receive. While the credit score is simply a number, the credit report details all past credit history activity.
What is credit scoring?
Your credit score is a system that creditors will use to determine whether you are high risk or low risk as a borrower. Your FICO (Fair Isaac Company Inc.) is a measurement to determine your credit score. Individuals can typically receive their credit history for free once per year by each of the three major agencies. Before applying for any type of loan, it’s important to understand your credit report and to correct any errors or mistakes that might be on it.
Equifax: (800) 685-1111
Experian (formerly TRW): (888) EXPERIAN (397-3742)
Trans Union: (800) 916-8800
These agencies may charge you up to $9.00 for your credit report.
Do I have a right to know what’s in my report?
Yes! The report will tell you everything in your report, including medical information, and in most cases, the sources of the information. The CRA also must give you a list of everyone who has requested your report within the past year-two years for employment related requests.
What happens if you are denied credit or don’t get the terms you want?
As I mentioned before, it’s important to understand your credit history to correct any mistakes or explain any errors or discrepancies in credit history. If you’ve been denied credit it could be either not enough payment history, not a stable enough payment history, or there could be some mistakes. If you have too high of a debt to income ratio, creditors may not accept the opportunity to loan you more money. Paying down your debt and yet keeping accounts open, shows that you have available credit and are less of a risk.
Factors That Affect Your Credit
Credit bureaus collect and sell four basic types of information:
Identification and employment information
Your name, birth date, Social Security number, employer, and spouse’s name are routinely noted. The CRA also may provide information about your employment history, home ownership, income, and previous address, if a creditor requests this type of information.
Your accounts with different creditors are listed, showing how much credit has been extended and whether you’ve paid on time. Related events, such as referral of an overdue account to a collection agency, may also be noted.
CRAs must maintain a record of all creditors who have asked for your credit history within the past year, and a record of those persons or businesses requesting your credit history for employment purposes for the past two years.
Public record information
Events that are a matter of public record, such as bankruptcies, foreclosures, or tax liens, may appear in your report.
What can I do to improve my score?
There are a variety of ways to improve your score and your score can change weekly. verify that you’re keeping up with payments, keeping your debt to income ratio low, and that you have a stable, long-term history of good credit. Other factors include:
- Paying all bills on time including medical and utility bills.
- Keeping the amount of outstanding debt as low as possible, especially on revolving debt such as credit cards.
- Don’t apply for new credit while trying to apply for a home loan. Too many new accounts can lower your score.
- Stay as far away from bankruptcies and foreclosures as possible. There are timelines when an individual can reapply for a home loan after a bankruptcy, short sale, or foreclosure and the further you get away from those limits, as long as you keep up with current payments and low debt, it will increase your credit score.
Wherever you are in the process is important to get a copy of your credit history, report, and score. Be fully aware of your financial situation and when you’re ready, give us a call. We can walk you through the application steps and find out how much home you can afford.