Credit ratings remain of great importance in 2019. Every consumer, regardless of whether they currently have credit lines open, needs to know their credit score. Why is this crucial? Men and women may find a housing application is denied to their credit score, jobs could be lost before they are ever obtained as this score is too low, or insurance rates may jump. What does every consumer need to know about credit ratings and how they affect a person’s life in a wide range of ways?
The Credit Score Model
Numerous people are not aware that there is more than one credit score model. Ask a person what their credit score is and they will likely provide their FICO score, a score which runs anywhere from 300 to 850. With this model, anyone having a score of 720 or higher will typically obtain the best credit cards and loan offers along with the lowest interest rates. Nevertheless, as there are several models, the same number can mean significantly different things depending on who provided the score. For example, when obtaining a debt consolidation loan, men and women need to know more about the product including the interest rate to be charged. When gathering this information, be sure to visit DebtConsolidationNearMe.com/California/index.php.
If the FICO score is the most commonly used model, why do other models exist? Each credit-scoring model differs somewhat and one model may better determine a borrower’s creditworthiness. For this reason, large financial institutions often choose to invest in several models and use the one they deem more appropriate for the specific situation. The borrower might find he or she has a credit score of 280 with Equifax and a credit score of 501 with VantageScore 1.0 at the same time if he or she has never obtained credit. Similar factors were considered. The difference is simply due to the credit-scoring model used. However, higher numbers are always better.
The Importance of a Credit Score
The credit score provides information about a person’s ability to pay his or her bills on time. A person’s entire financial situation is included in this three-digit number, although this may seem impossible. What consumers must realize is creditors take this information very seriously when determining whether to loan money to a person. The lower the credit score, the more one will pay to obtain the desired funds if they are provided at all. A high credit score, in contrast, shows the borrower is financially responsible, which is exactly what lenders wish to see.
A Person’s Credit Score May Not Be Consistent Across the Models
As mentioned above, credit scores can and do vary by the credit model used. However, they may vary based on other factors also. For example, a debt may be reported to one credit reporting agency and not another. This can have an impact on the consumer’s credit score. For this reason, every person should pull their credit report from the three major credit reporting agencies and check the reports for accuracy before asking to borrow funds. Any inaccurate information on these reports, such as a debt that has been paid off but hasn’t been reported to one agency, can bring the score down and harm the consumer. The potential borrower needs to ensure all information on these reports is accurate before any application is submitted.
How Does a Credit Report Differ From a Credit Score?
Experian, Equifax, and TransUnion serve as the three major credit reporting agencies. These agencies collect information about individual consumers and compile it into one report for their agency. This includes the consumer’s name, address, social security number, and financial information. A copy of each report may be obtained free every year by making use of AnnualCreditReport.com, the federally authorized provider of free credit reports. The information used in these reports is what the credit bureaus use to calculate the consumer’s credit score. Pulling these reports annually is of great importance for another reason. When a person pulls their report, they may be able to detect identity theft in a timely manner, a crime that is becoming more common every day.
How Is the Credit Score Calculated?
Consumers often wish to know how this information is used to generate the credit score. While each credit reporting bureau makes use of their own algorithm, one they do not share, the FICO model looks at five things when determining a borrower’s score. Following are the factors considered at this time.
1. The borrower’s payment history accounts for 35 percent of the score. For this reason, payments should never be late or missed. By simply making all payments on time, a consumer will find he or she can improve their credit score in a short period of time.
2. The total amount owed makes up 30 percent of the score. The credit bureau looks at the total amount owed in relation to the total available credit. Often referred to as the credit utilization score, experts recommend borrowers keep this figure at or below 30 percent for a higher credit score.
3. Lenders likewise want to know how long a person has been making use of credit. This accounts for 15 percent of the credit score, and the longer a person has been borrowing funds, the better off he or she will be.
4. Lenders also look at the type of credit used by the borrower. Having a mix of debts will boost one’s score, so try to have credit cards, mortgage or auto loans, and more in the credit portfolio to obtain a higher score.
5. Credit inquiries also play a role in a consumer’s credit score. When a person opens a number of accounts in a short period of time or requests credit from several lenders simultaneously, this can bring the credit score down. Lenders take this as a sign the borrower cannot keep up with his or her current obligations. While this only makes up ten percent of a person’s credit score, it is still of importance. Fortunately, shopping multiple providers for a home or auto loan in a short period of time is considered one inquiry as opposed to multiple.
The more one knows about his or her credit rating, the easier it is to ensure this number is as high as possible. Keep this in mind the next time you wish to obtain credit. Check your score and try to improve it before proceeding. Doing so could save you a great deal of money over the life of the loan.