June 13, 2024

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Delighting finance buffs

Credit Bureau Reports and Your Credit Rating – Do You Understand Your Credit Score?

Do you know what a credit rating is? Furthermore, do you know what your own personal credit score is? Most people don’t think they need to worry about it. They do. Even if you don’t ever borrow money you need to be concerned. Let’s say you need to buy a new car, and like most of us, cannot pay cash for it. You will need a car loan. At some point in your life, you will probably want to buy a home. You will probably need a mortgage! The most important factor the lender considers is your credit history and credit score. This wil factor into the interest rate offered to you. You need to understand this important part of your financial life in order to manage it to work in your favor. If you ignore it, it will probably work against you.

A credit rating is issued by an agency. The rating is a measure of how you have handled your finances. A credit report contains information on where you live, how you pay your bills, and whether you’ve been sued, arrested, or filed for bankruptcy. Nationwide consumer reporting agencies sell the information in your report to creditors, insurers, employers, and other businesses that use it to evaluate your applications for credit, insurance, employment or renting a home.

There are three major bureaus. Each company determines your personal score based on a formula developed by the Fair Isaac Corporation. Each agency uses a slightly different term for their score. Equifax calls their score “Beacon;” Experian calls their score “FICO;” and Trans Union calls their score “Empirica.” Since lenders do not usually report account activity to all bureaus your credit score may vary.

The rating takes into account activity related to revolving and installment based credit that is not secured by hard assets. This includes your credit cards, term loans, trade accounts, public utilities, lines of credit etc. The agencies may not use the same scoring system so even if all the information is exactly the same the score may vary. The rating system provides you with a credit score between 300 and 900 and a higher score indicates a lower credit risk. A score of 650 or higher is usually considered good credit by most lenders.

What Factors Matter?

Payment History -Were payments made on time? – 35%

Amounts Owed – Is the balance owed close to the limit? – 30%

Length of Credit History – How long have your accounts been open? -15%

Taking on more debt – How many new accounts have been opened/? – 10%

Types of credit in use – Mortgage, auto, consumer finance accounts, revolving and installment loans -10%

What is not calculated?

  • Your race, color, national origin, sex, age, marital status
  • Your salary, occupation, job title, employment information or home address
  • The interest rate on your charge accounts
  • Any items such as child support, rental agreements, credit counseling participation

Is your credit score always accurate? No. It is estimated that almost 80% of credit reports contain errors. So if you want to correct these errors you will have to get a copy of your report. Fortunately, the Fair Credit Reporting Act requires each of the nationwide consumer reporting agencies (mentioned above) to provide you with a free copy of your credit report, at your request once every 12 months.