In this first Credit Score Guide we look at ‘How Credit Scores work’.
An individual’s credit score measures the likeliness of them repaying a loan. The credit score of an individual allows companies to assess the risk associated with giving a loan. A poor credit score can prevent someone from taking up even basic services such as telephone rental; a good credit score is an absolute requirement for qualifying for loans and mortgages.
A good credit score implies that an individual is careful about his finances and in case he incurs a debt, he can be trusted to repay it. A good credit score not only results in lower interest rates on credit cards but also comes in handy when applying for a new job or seeking an apartment. A credit score is increasingly being used by businesses as a means of checking an individual’s background.
Equifax, Experian, and Trans Union are the three major credit scoring agencies that provide credit scores. The fees charged by these agencies range between $ 10 to $ 40. The agencies are bound to provide a free copy to an individual who has been denied credit over a period of 60 days. One credit report is to be made available free to a person on welfare, an unemployed individual or if one is given an inaccurate report for reasons such as fraud. Individuals applying for mortgage are entitled to a free report from their lenders.
Credit reporting agencies usually use calculating software developed by Fair Isaac and Company and therefore the credit reports are often referred to as FICO scores; however, the scores provided by different agencies may vary with the sources of information used by the agencies. The credit score is basically determined from statistical data that changes each time an individual repays a loan amount or takes a new loan. Creditors compare an individual’s credit report with those of other people with a similar income profile and try to judge the feasibility of issuing a loan to the individual. Factors such as amount of outstanding debt, late payments, age of accounts, number of accounts, current loans affect the credit score of a person.
A creditor is legally bound to apprise an individual of the reasons for refusing him credit. Reasons can include several open credit accounts or credit balance close to the credit limit. One should study the credit report carefully and make an effort to better the factors that are hurting the credit score. The foremost way to improve the credit score is to ensure that bills are paid on time. Outstanding debt should be reduced, one should also try and ensure that the number of credit checks done by creditors is as low as possible, and the older accounts should be maintained.
A score of 760 is considered an “A” and above will get a person the best credit rates; 700 – 760 is a “B”; 600 – 700 is a “C”; a score of lower than 600 will get a rating of “D” or “F” and implies that one will have to pay higher interest rates. According to the Equal Credit Opportunity Act, a person’s credit score should be evaluated independent of his race, religion, gender, and ethnic background.