Your credit score measures your financial responsibility. It has a huge impact on your financial life whether you are applying for a home loan, car loan, credit card, or a loan to finance college tuition; looking to rent an apartment; getting a job; and even obtaining auto or homeowners insurance. It is also used to determine the rate of interest.
There are five factors that influence credit scores:
- Payment history (Paid on time? History of late payments?)
- Type of loan accounts
- Accumulated debt to income ratio
- Age of customer credit accounts
- Most recent credit application (When was the last time customer opened a new credit line?)
The higher your credit score, the stronger the indication to lenders that your debt will be repaid as scheduled. That is why you should monitor your credit report and score at least once every 12 months, and why you should know exactly what your credit score is; you must also develop good credit habits to keep those scores as high as possible. Despite the importance of credit-worthiness and diligent monitoring, a recent survey conducted by the American Bankers Association found that less than half of U.S. consumers know their credit score. Are we Americans afraid to know the truth? Do we think that it is unimportant?
Good reasons to monitor your credit score:
It will determine access to credit. Lenders (home, auto, tuition, etc.), look at credit scores to determine risk. When scores are high, a prospective borrower will have an easier time obtaining credit. A poor score could cause a lender to decline the loan application.
It will determine the interest rate you will pay. Not only do credit scores affect loan approval, they often determine interest rates offered. If an applicant has a high credit score, he/she will be offered credit at a lower interest rate than an applicant with a poor credit score.
A high credit score is appealing to landlords. Landlords often pull the credit history of a prospective tenant to uncover any patterns of late or delinquent payments. No landlord wants the risk of tenants who fail to pay rent. A low credit score is suggestive that the prospective tenant is a high risk and will often result in the denial of a rental application.
A low credit score can mean paying (or paying higher) deposits. Utility companies – gas, water, electric – offer services upfront, with a promise that the customer will pay the bill in full every billing cycle. With so much at stake, utility companies will often check credit to ensure that the consumer will make good on the promise. A customer with a poor credit score suggests payment lapses or lateness and could result in the requirement of a deposit or co-signer upon default.
Monitoring credit report and score will help detect identity theft. Running regular checks and credit scores will alert consumers to any sudden, negative, changes. Because these changes may have resulted from fraudulent activity, the consumer will know instantly if someone has obtained new credit, rented a house, signed up for utilities, or even gotten a new job in his/her name. Reporting such theft instantly will minimize damage and pain. A national credit reporting company can help stop credit fraud and prevent future misuse of identity. If you discover you’re a victim of identity theft, it’s a good idea to monitor your credit and report damaging and fraudulent information as it appears. You can also add a fraud alert to your credit report. Additionally, if your credit card and/or other personal information has been compromised due to a data breach, it is a good idea to pull your credit report.
To get and keep a good credit score, pay all your loans on time, make sure information in your credit report is correct, and don’t use any more credit that you absolutely need.
How do you obtain a credit report and what does it costs?
Under federal law you are entitled to a copy of your credit report annually from all three credit reporting agencies – Experian®, Equifax® and TransUnion®. Because each reporting agency collects and records information in different ways; each may not have the same information about your credit history. Obtain a credit report from each one. For example, Experian reports on-time rent payments; Equifax and TransUnion only report negative rent data. Experian has status details for each closed or transferred account. Equifax lists open and closed accounts separately which is convenient for anyone not quite sure about their financial situation. Consumers can also view which accounts have been closed and why. TransUnion has the most detailed employment section. It lists company name, position and date hired. This is important because it shows potential lenders how long a consumer has been with his/her current employer. Applicants with two years or more of employment history at their current employer are more likely to be approved for credit.
While you can obtain all three reports at once, you can also space out report receipts to one every four months. Credit reports can often change multiple times a year because the consumer uses existing credit or opens new credit accounts. Relocation, a job change or transfer can also cause reporting changes. Thus, spacing out reports will assist in assuring accurate information over the longer haul.
Consumers may request reports at four-month intervals by visiting www.annualcreditreport.com. Complete personal information and choose to view one report instead of all three. In four months, log on again; choose a different bureau’s report to view. Four months later, request a report from the remaining bureau.
What should you look for once you obtain your credit report?
It is important to make sure all information is accurate. Studies have found as many as four in five credit reports actually contain errors; 25% of these mistakes are egregious enough to cost someone a loan. Errors exist on credit reports for a many reasons. Maybe you used a shortened version of your name (Chris versus Christopher) on a credit application, or maybe your lender transposed two numbers of your Social Security number. Your payments could be applied to the wrong account, or someone else’s payments could be applied to yours.
Catching mistakes early is extremely important because some errors may be difficult to repair. If you find a mistake in your credit report, write to both the consumer reporting agency and the creditor that provided the information, if applicable. Tell them what you think is wrong and why. Include copies of any documents that support your position.
Given the ease in which you can obtain your credit report and score, there is no reason not to review it on a regular basis. Because your credit score follows you forever and plays a major role in your financial health and well-being, in the end, what matters most is that you use credit responsibly, keep debts low, pay your bills on time, and monitor your reports.
Attorney, certified civil mediator, and award-winning author of the Zachary Blake Betrayal Series—Mark Bello is also the CEO of Lawsuit Financial and the country’s leading expert in providing non-recourse lawsuit funding to plaintiffs involved in pending litigation. He is also a member of the State Bar of Michigan, a sustaining member of the Michigan Association for Justice, and a member of the American Association for Justice.