How to Understand Credit Scores & Risks

Gain knowledge necessary to understand credit scores and types of credit risks. Knowing and understanding these terms is essential in today's society. Credit scores coincide with credit reports and are maintained by three main credit agencies, Equifax, Experian and TransUnion. Each of these maintains a separate credit file for each individual, identifiable by an individual's personal information and Social Security number. Each credit file contains a credit score that potential lenders or companies use to evaluate financial risk.

Instructions

Credit Scores and Risks Explained

1

Learn the range of credit scores; they range from 300 to 850 with the average consumer score being 693. Scores are determined by the evaluation of data listed on your credit report. Payment history, balances owed, length of credit history, new accounts, and the types of credit are the main factors in determining a credit score. Positive credit such as on-time payments, low balances and few inquiries would result in a higher rating. Making payments late, possessing high balances, and having a high number of inquiries lowers your credit score.

2

Know what lenders look at. Credit scores determine if a company or person is going to extend you credit. Other factors may include employment and length of time at your residence. Generally, the higher the credit score is the more likely it is that you are granted credit. With lower credit scores, one may be denied credit or offered a high interest rate with unfavorable terms.

3

Understand the risks; lenders evaluate your credit score, payment history, and balances. For example, if you have multiple late payments with an automobile loan, it would be a risk for lender when buying a new car. Mortgage lenders may require a history of no late payments to qualify for a prime loan with favorable interest rates. Possess a credit score ranging from 720 to 850 and qualify for an excellent mortgage interest rate. Possess multiple late payments, high credit balances or a score below 640 and the lender may consider that a risk.

Improving Credit Scores

4

Obtain a free credit report at annualcreditreport.com; this website offers all three credit reports. Input your basic information on the website, it then takes you to each credit agency's website. While visiting each site, buy your credit score online; scores are not offered for free.

5

Review your credit reports for any inaccuracies. Search for items such as payments that were marked late that were paid on time, incorrect balance information, or accounts that are not yours. Make a note of any errors that you have found in your credit file. Disputing and correcting these errors improves your credit score.

6

Dispute Inaccuracies. Visit each credit agency's website and begin the dispute process. Go to equifax.com, scroll down to correct errors, click on "Start a new Dispute," and follow the dispute process. Visit experian.com, scroll down to credit report assistance and click on "Disputes," follow the dispute process. Go to transunion.com, scroll down to consumer assistance and click on " dispute an item," follow the dispute process.