Your credit score is a simple number that has a huge impact on your life: it can affect everything from your ability to get a mortgage to the size of your utility deposit… even whether or not you land a job. You have a legal right to know how you rate. The Fair Credit Reporting Act (FCRA) allows all American consumers to get a credit report every year at no cost. The law is designed to help all consumers combat the dangers of identity theft and credit card fraud, as well as abusive practices that some companies have adopted in the past. Unfortunately, surveys have revealed that up to 60% of Americans don’t know this critical piece of information. If you’re one of them, it’s time to change that!
Score vs. Report: What’s The Difference?
If you’re going to look for information about your financial standing, you should know what you need. If you want a collection of raw information or data about loans and other transactions in the past year, you should look for your credit report. If you want to know your standing with lenders and financial companies, you will need a credit score. Your score determines whether or not you can get a new loan or almost any type of financial assistance. The figure is a rating of how likely you are to meet your financial obligations, based on your personal history.
What Does Your Score Mean?
Bureaus use these criteria to determine and rate your level of financial responsibility:
35% – Track Record and Payment History
A summary of your efforts to pay off loans, and whether or not you can pay them on time.
30% – Total Amount Owed
When you add up all your debts, how much do you owe? If your existing debts are close to your limit, then you have a slimmer chance of getting a new one approved.
15% – Tenure
Have you borrowed money before or is this your first time? Your tenure in borrowing money is also considered to test how good you are at juggling multiple loans and avoiding penalties from late payments.
10% – Amount Of New Debt
Lending companies will also look at your most recent loans, specifically, those you have made within the past year.
10% – Debt Types
Bureaus review the types of loans you have. Do you have a home loan and an auto loan? Do you own more than one credit card?
When you put all these together, you come up with a comprehensive view of your abilities as a borrower, and whether or not you can earn the trust of lenders.
Your score will fall into one of these categories:
These are the numbers used by lenders and finance companies to determine the likelihood that you will default on a loan.
Where Can You View Your Report and Score?
You can get free credit reports here. You are entitled to one free report a year from the three major bureaus: Experian, Equifax, and TransUnion. A potential lender might use any one of them, so it’s best to check all three each year.
Your report is not infallible. According to the Federal Trade Commission (FTC), 5% of Americans have potentially damaging errors in their report. That’s why you need to check all three: you don’t know which one a potential lender will use, and any one of them could have a mistake. Review the reports carefully, and watch out for accounts or transactions that don’t belong to you, or late payments you know you made on time.
To correct an error on your report, you will need to submit a dispute letter to the bureau in question. There’s a sample dispute letter here. You will have to include all the evidence required to reverse your record. For example, if your report claims that you made a late payment, you should be able to present a payment receipt with the correct payment date. Make several copies of these important documents and keep all the original files. Be sure to keep records of all transactions!
As soon as you’ve submitted your corrections, the bureau has 45 days to get back to you with a resolution and a new rating.
You should also monitor your FICO score, which is used to determine the success rate of mortgage loans, car loans, and card approvals. The FICO score gathers reports from the top 3 financial bureaus, making it the most reliable source of lending criteria and information. Tracking your FICO score is also one of the best ways to thwart identity theft and fraud. Ideally, you should check your FICO score every quarter of the year.
Independent websites, notably Credit Karma, offer user-friendly packages that let you view credit scores and reports at any time, along with alerts that help you spot identity theft and loan offers tailored to your credit score.
How To Improve Your Score
If you have a poor rating and are worried about your chances of getting a loan, you should investigate the ways you can improve your score. Remember that your score does not determine whether or not your loan is approved; it is only a metric used by companies to have a better read on your abilities as a borrower.
Improving your financial standing is not always easy. You will need to get your house in order, reduce your debt, make every payment on time, and be as responsible a borrower as you can be. Of course, all of these are good things to be in any case, so there is extra motivation! This article gives a more detailed outline of steps you can take to improve your score.
Your credit score is important, and the first step to improving it is knowing what it is. Learning how you rate and keeping track of your standing are key steps toward building a responsible financial future. The reports are free; all you have to do is ask… so get them today, review them carefully, and take control of your financial life!