A credit score is used by a lender and certain other service providers to assess the credit risk associated with an individual. Generally, the higher the score, the lower the risk associated with the individual. The score is derived from a complex mathematical formula that evaluates information on a credit file. Your credit score is checked by lenders, insurance companies, some employers and leasing companies before making a decision on a credit request, employment or lease application.
Credit Reports and Monitoring
Visit the websites of the three major credit-reporting agencies, Equifax, TransUnion and Experian. On their respective websites, individuals can have instant online access to their credit report and dispute incorrect credit report information online. Monitor the activity on your credit profile by signing up for credit monitoring with these agencies, pulling your free annual credit report or pulling your credit report on a regular schedule. These agencies offer services that allow you to sign up for email alerts on critical changes to your credit, perform personal analysis of your credit and debt and freeze your credit report to restrict future inquires.
Understanding Your Score
Credit scores range between 300 and 850 with most scores falling between 600 and 750 points. Having a high credit score does not guarantee credit nor does having a low credit score rule out credit. The score is used as an indicator, coupled with other factors, which lenders and insurers use to predict credit risk. Efforts can be made to improve your score by paying down your debts, resolving any delinquencies, clearing out any improperly reported items and paying your bills on time. U. S. law prohibits credit-scoring formulas from considering your race, color, religion, national origin, sex or marital status.
Costs of Low Credit Score
Approximately 90 percent of the largest banks use your credit score for credit decisions. An individual with a low credit score may be able to obtain financing for a mortgage; however, it will come at a high cost because of higher interest rates. A low credit score can also result in higher insurance premiums. Many property and casualty insurers use information collected from credit reporting agencies, such as your driving record, credit and claims history, to offer you the most appropriate rate.
Impact of Inquiries
When you apply for credit, you trigger an inquiry on your credit report. Inquiries you initiate as part of a credit request have a small impact on your credit score while an inquiry to obtain your credit score should not have any impact. Furthermore, inquiries initiated for the purposes of preapproved credit offers do not have any impact on your credit score. During a rate-shopping period where a potential homebuyer is shopping mortgage rates, there is an allotted 30 to 45 day shopping window that limits the impact of the multiple credit inquires.
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