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How Your Credit Score Determines The Size Of Your Bank Account
By: Kevin Erickson
Every time you apply for any type of loan or you are issued credit or you pay
any bill, it becomes a part of the equation that determines your credit rating.
The primary or big three credit agencies are: Experian, Equifax and Trans Union.
The credit score they determine is what all major lenders and most companies use
when deciding if they will lend you money or issue you credit and the terms that
credit will have.
Your Credit Rating - What Does It Include?
All of your current debts are included when determining your credit rating.
Basically, your credit rating is a history of all your debts, with special
emphasis placed on anything that has gone wrong.
A few of the primary factors that determine your overall rating include: Late
Payments - The number of times you've been 30, 60, 90 or more than 120 days late
on any payment. This could include rent, mortgage, phone bills or any type of
credit card. Defaulting (never paying) on a debt will clearly hurt your credit
rating for a period of time. In some instances, up to 7 years but each company
issuing credit has their own guidelines and in many cases it will cause a
negative impact for 2 - 3 years. Owing a high percentage compared to your credit
limit also brings down your credit score. For example: If you owe $10,000 on
your credit cards you are much better off to owe $3,000 on two different cards
with a credit limit of $5,000 each and 4,000 on another card with a credit limit
of $6,000 than to owe the entire $10,000 on one card with a credit limit of
$10,000.
It is also worth considering that the credit report of anyone you live with or
more precisely anyone with whom you share a debt obligation with is also linked
to your report and if they default or have a late payment, it will reflect on
your credit score. This happens with when couples get divorced and one party
decides to stop making payments.
What is FICO?
The standard method for expressing your credit rating is called FICO. In a
nutshell, it's an acronym for expressing your credit worthiness with a number.
FICO was named after the Fair Isaac Corporation, who invented it.
One common misconception about credit score is that every time your credit is
pulled is that it hurts your credit score. This is how it works.
If it's pulled by a lender then it doesn't hurt your score because it's assumed
they would only be pulling it to determine if you qualify for a mortgage. On the
other hand, if you continually apply for department store credit cards or car
loans or similar types of credit and those types companies pull it then it can
hurt your credit score, if it's pulled too many times in a short period of time.
The exact number of times it can be pulled in a particular time frame before it
hurts your score is an industry secret but if you use common sense and don't
over apply then you should be ok.
Why Your Credit Rating is So Important
Any time you get turned down for a any type of loan, chances are that it was
because of your credit rating. Companies that are considering giving you a loan
rely almost exclusively on this rating when making the decision whether or not
to issue you credit. Regardless, the bottom line is this. In virtually all
cases, the lower your credit score the higher the interest rate.
Your credit score directly determines the credit terms you'll receive for any
type of loan - mortgage, car, credit cards, etc. And remember, all bills affect
your credit rating so if you don't pay your phone bill or your utilities or your
rent on time it will have an effect on the terms you receive or even if you
qualify for a mortgage or car loan. So get into the habit or paying your bills
on time and get a solid credit rating because the amount of money you'll save
over your lifetime in interest charges will be huge.
Free Credit Reports
One of latest trends in credit reporting is for companies to offer individuals a
free credit report. In and of itself, there's nothing wrong with this but I
would like to point out a vital point that you need to be aware of.
I mentioned earlier that there are 3 primary credit agencies that lenders rely
on looking at your credit. The key factor here is three and that's where you can
run into trouble when you get your Free Credit Report. When you get a Free
Credit Report you will only be getting the results from one of the primary
credit agencies and this can misleading.
The reason it's misleading is because virtually ALL lenders will pull what's
called a tri-merge credit report when you apply for a loan. They do this in
order to get the full picture of your credit history. Then they throw out the
high and the low score and use the middle score to determine your credit rating.
When you get your Free Credit Report you will only be given a credit report
pulled from one of the agencies and so you have a pretty good chance of being
misled as to what your actually credit score is. Unless, the credit agency that
was used just happened to be the one with the middle credit score you won't have
your 'true' credit score. And the reason this matters is because the difference
between the three scores can be significant. So be wary of single agency credit
reports and when applying for a loan always ask for your middle credit score
because that's the only one that really counts.
About the Author:
Kevin Erickson is a contributing writer for: http://www.debtmgmtresources.com
and
www.aneyeondebt.com and
www.debtmergeresources.com. This
article may be reproduced only in its entirety. |
