What exactly is a Credit Score?
Lenders use a credit score to assess the level of risk of a borrower. It helps them to determine whether or not the borrower can repay a loan on time. To a lender, a high credit score means a lower risk.
Why use credit scores?
- Your credit score allows the lender to evaluate your credit situation quickly, which speeds up the loan process.
- Everyone is treated equally. All scores are based upon the same criteria for consistency.
- Your score can change. The better you manage your credit, the more likely your score is to improve. With an improved credit score, you may not be held accountable for bad scores in your past.
- More people can get credit. Credit scores help the lender to easily recognize the risk involved and, as a result, more people are offered credit.
- Credit scores can help lower rates. Overall, lenders are able to lower their rates because more people are allowed to borrow.
Why is it important to have a good credit score?
Your score determines your credit risk level. This may greatly influence what your available credit will be as well as the terms and conditions (interest rates, etc.) that are offered to you by your lender. Good credit scores generally help you get:
- better credit offers
- lower interest rates
- quicker processing with credit approvals
How can I check my credit?
There are three main credit-reporting agencies where lenders obtain your report and scores:
- Equifax (800) 685-1111
- Experian (888)397-3742
- Trans Union (800) 888-4213
By Federal law, you can get a free credit report once a year from each of the three nationwide consumer credit reporting companies, or by going to www.annualcreditreport.com. It is recommended that you do this at least once a year, or six months prior to making a major purchase (like a new home). That way you have time to check for mistakes, make corrections, or improve your credit if necessary.
What if I find a mistake?
If a mistake should appear on your credit report, contact the agency for an investigation. If there truly is a mistake, proper steps will be taken to making such corrections. Be sure to that your lender is aware of any incorrect information on your report in case you are in the process of getting a loan. While incorrect or incomplete information might not drastically affect your credit score, it is better to be safe than sorry.
What can I find on my credit report?
Your credit report contains all the details of your credit history. This is what FICO scores are based on. Besides your identification information, you can find both negative and positive facts concerning:
- the types of credit that you have
- the length of your credit history
- the amount of used credit (how much you owe)
- your payment history (were your payments on time)
- requests for new credit
- credit report inquiries (how many times your report has been checked, and who asked for the report
- public records and collection items (information about bankruptcies, foreclosures, court records, debt from collection agencies, etc.)
How is my score determined?
The actual credit score is calculated by an equation that evaluates the information gathered from your credit report. For a lender, the credit score number represents your future credit risk level, which may influence their decision.
What does it mean?
Once your credit score is calculated, that number represents the health of your credit. The higher your score, the better your credit is. Along with the credit score number, you are given as many as four reasons (the top four reasons) explaining why the score is not higher. This will help explain why a lender may have denied a request, or did not offer you better loan terms. These reasons can also be helpful when searching for mistakes on the report, or looking for ways to improve your credit health.
What can I do to improve my credit?
Credit scores can change, but it doesn’t happen overnight. Keep in mind that making improvements will take time before your score actually increases.
Things that help to improve credit scores:
- Pay off as much debt as soon as you can. The less you owe, the better your credit.
- Try to keep your credit and balances as low as possible.
- Make your payments on time! If nothing else, make sure your house payments or rent are ALWAYS on time. This can directly determine the conditions of your home loan.
- Always be responsible when opening new accounts, especially if you’ve had trouble in the past. This will help re-establish your credit history.
- Don’t open a lot of new credit cards, especially if you haven’t had credit for very long. A lot of credit cards with a short credit history could have a negative effect on your score.
- Don’t close unused credit cards immediately, just keep the balance at $0 until your score has improved.
- If you are rate shopping among various lenders, do all your credit inquiries within a short period of time. This will let the credit agencies know that you are rate shopping, and not opening a lot of new accounts.
- Check your credit report for mistakes either once a year, or at least six months before you make a major purchase, like a house or a car.
- Always request your credit report and credit scores directly from the credit agencies or an organization with permission to provide credit reports to their customers. This will not affect your score.
- Don’t check your credit unless you need to. Too many unnecessary inquiries may have a negative affect on your score.
- Only apply for and open new accounts when necessary and then manage them responsibly.
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