CREDIT REPORTS

Your credit score determines whether or not you qualify for a loan, and at what rate of interest you can borrow. Having a good credit score means you get better rates, higher credit limits, and other benefits. So where does this score come from? Who determines this three-digit number that makes such a huge difference in your interest rate?

The answer is at once simple and complex. Typically, the three major consumer credit reporting agencies – Experian, Equifax and Transunion – are the entities that provide the information that your credit score is based on. These credit bureaus compile information on your creditworthiness and produce reports, called credit reports, which detail the information that they have on file. For instance, if you are late on a payment, or if you default on a loan, this information will be reported to one of the three credit agencies and noted on that agency’s credit report.

Your credit score, or FICO score, is a three-digit number that represents a statistical analysis of your creditworthiness. Your credit score is based on the information in your credit report, which is usually sourced from the three major credit bureaus. Why should you care about this score, and why is it important to maintain a high credit score? Because this score is the primary tool used by lenders when you apply for a loan. When you apply for any form of credit, the bank uses this score to determine the likelihood of your default on a loan, and whether you will make timely payments if they lend you money.

For instance: let’s say you want to buy a car, apply for a mortgage on your home, or get a credit card in your name. When you apply for the credit, your bank, credit card company or mortgage lender uses your credit score to evaluate the potential risk of lending money to you. Your credit score determines whether or not you qualify for a loan, and at what rate of interest you can borrow. Having a good credit score means you get better rates, higher credit limits, and other benefits. A lower interest rate translates to a very real savings to you over time.

When people say they’re going to check their credit, it generally means they’re going to pull a copy of their credit report. The myth about checking your own credit will lower your credit score is false. Looking at your own credit report has no affect on your credit score whatsoever. The credit bureaus consider that a “self-disclosure” or a “self-inquiry” and it does not help or hurt your score. It is obvious that checking your credit report is not an official inquiry so it is not treated as one. An official inquiry is when a financial institution checks your credit report to see whether you qualify for any type of loans (such as mortgage loans, auto loans, student loans, etc.) depending on your credit history.

For many years, the credit industry treated consumer credit scores like a secret handshake between members of an exclusive cult. In fact, your credit score was such a secret that you could not even get it yourself!

History of Credit Scores

Hard as it may be to believe, consumers were not allowed to access their own credit scores due to contractual agreements between the bureaus and the lenders; the credit bureaus could reveal your credit score to a lender to summarize your creditworthiness, but lenders were only allowed to show you your own score if your credit was denied.

These days, there are plenty of ways for you to obtain your credit score on the internet. Largely because of a 2001 advance in California mortgage lending law, credit bureaus now make this information widely available to consumers for a reasonable fee.

What is a Credit Score Check?

There are many reasons why you might have a low credit score. You may have gone through a rough period financially, or you may have shared credit with a spouse or family member who didn’t make payments on time. Whatever the reason, the bottom line is that your bad credit history can cost you hundreds or thousands of dollars over time, in the form of high interest rates on your mortgage, car payments, or credit card bills. If your credit score is low enough, you might not qualify for any of these forms of credit at all.

If you find yourself in this position, there are steps you can take to improve your credit score. With a plan in place, you can rebuild your credit profile, get your score up and make a huge difference in your ability to get credit in the future.

Changes to the Fair Isaac Credit Report scoring system are going to occur shortly. Individuals need to know the “ins and outs” of the new system to better prepare for when the changes take effect. There will be some new benefits for consumers, but until the system is in place, no one can gauge the potentially negative impact on your credit report.

New FICO Scoring System More Accurate

Your FICO score is one of the main sources of information that banks look at to determine your creditworthiness, yet most consumers have no idea how their credit card use impacts this score. In fact, using your credit cards can actually improve your credit rating.

Here are some tips to help you become a more savvy credit card user:

When you are trying to improve your credit score, your first impulse might be to start canceling accounts. However, reducing the amount of credit available to you may, in fact, hurt your credit score rather than help it. One third of your FICO score is based on what balance you are carrying on your cards in relation to the overall amount of credit available to you. The bank is more interested in that ratio than the actual amount of credit, or number of cards. So ideally, you would want to keep your credit card balances low but keep the card open.

Also, having a lot of credit cards won’t necessarily hurt you if you are not carrying high balances on the cards. For example, if you have had 15 cards over the last 20 years, but you only use three of them, that won’t necessarily bring down your FICO score. Your credit rating is based on the proportion of your debt, not the number of cards. Having a lengthy credit history counts in your favor. As long as your card is on the credit report, it counts – and closing accounts only brings them off of your credit history that much sooner.

Do you know your FICO score? Most consumers don’t, yet your FICO score is one of the main sources of information that banks look at to determine your creditworthiness. In the United States, your FICO score – also known as a “credit score” – is a numerical value derived from a statistical analysis of your credit report. Credit scores are based on information provided by three major credit agencies: Equifax, Experian, and TransUnion. Each credit agency uses a different scoring system and credit card use impacts this score in several important ways.

With the economic crunch weighing down more consumers than ever, having a high FICO credit score is one of the best ways to stay afloat in these frightening times. One’s credit score determines the quality of loan offers as well as the interest rates borrowers are entitled too and there are ways to help improve your rating as errors do occur. Fortunately consumers can add 100 words to their credit bureau file to help clarify mistakes on their history.

According to Steve Bucci, author of Credit Repair Kit for Dummies “Twenty-five percent of credit reports have errors.” People who want to take charge of their financial health should make sure to order their free credit report scores annually and if there are discrepancies on there, do something about it. If mistakes are spotted they must work quickly and diligently to clean up their credit history.