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How Your Credit Rating Determines The Size of Your Bank Account
Every time you apply for any type of loan or you are issued
credit or you pay any bill, it becomes a part of the equation
that determines your credit rating.
The primary or big three credit agencies are: Experian, Equifax
and Trans Union. The credit score they determine is what all
major lenders and most companies use when deciding if they will
lend you money or issue you credit and the terms that credit
will have.
Your Credit Rating - What Does It Include? All of your current
debts are included when determining your credit rating.
Basically, your credit rating is a history of all your debts,
with special emphasis placed on anything that has gone wrong.
A few of the primary factors that determine your overall rating
include: Late Payments - The number of times you've been 30, 60,
90 or more than 120 days late on any payment. This could include
rent, mortgage, phone bills or any type of credit card.
Defaulting (never paying) on a debt will clearly hurt your
credit rating for a period of time. In some instances, up to 7
years but each company issuing credit has their own guidelines
and in many cases it will cause a negative impact for 2 - 3
years. Owing a high percentage compared to your credit limit
also brings down your credit score. For example: If you owe
$10,000 on your credit cards you are much better off to owe
$3,000 on two different cards with a credit limit of $5,000 each
and 4,000 on another card with a credit limit of $6,000 than to
owe the entire $10,000 on one card with a credit limit of
$10,000.
It is also worth considering that the credit report of anyone
you live with or more precisely anyone with whom you share a
debt obligation with is also linked to your report and if they
default or have a late payment, it will reflect on your credit
score. This happens with when couples get divorced and one party
decides to stop making payments.
What is FICO? The standard method for expressing your credit
rating is called FICO. In a nutshell, it's an acronym for
expressing your credit worthiness with a number. FICO was named
after the Fair Isaac Corporation, who invented it.
One common misconception about credit score is that every time
your credit is pulled is that it hurts your credit score. This
is how it works.
If it's pulled by a lender then it doesn't hurt your score
because it's assumed they would only be pulling it to determine
if you qualify for a mortgage. On the other hand, if you
continually apply for department store credit cards or car loans
or similar types of credit and those types companies pull it
then it can hurt your credit score, if it's pulled too many
times in a short period of time. The exact number of times it
can be pulled in a particular time frame before it hurts your
score is an industry secret but if you use common sense
and
don't over apply then you should be ok.
Why Your Credit Rating is So Important Any time you get turned
down for a any type of loan, chances are that it was because of
your credit rating. Companies that are considering giving you a
loan rely almost exclusively on this rating when making the
decision whether or not to issue you credit. Regardless, the
bottom line is this. In virtually all cases, the lower your
credit score the higher the interest rate.
Your credit score directly determines the credit terms you'll
receive for any type of loan - mortgage, car, credit cards, etc.
And remember, all bills affect your credit rating so if you
don't pay your phone bill or your utilities or your rent on time
it will have an effect on the terms you receive or even if you
qualify for a mortgage or car loan. So get into the habit or
paying your bills on time and get a solid credit rating because
the amount of money you'll save over your lifetime in interest
charges will be huge.
Free Credit Reports One of latest trends in credit reporting is
for companies to offer individuals a free credit report. In and
of itself, there's nothing wrong with this but I would like to
point out a vital point that you need to be aware of.
I mentioned earlier that there are 3 primary credit agencies
that lenders rely on looking at your credit. The key factor here
is three and that's where you can run into trouble when you get
your Free Credit Report. When you get a Free Credit Report you
will only be getting the results from one of the primary credit
agencies and this can misleading.
The reason it's misleading is because virtually ALL lenders will
pull what's called a tri-merge credit report when you apply for
a loan. They do this in order to get the full picture of your
credit history. Then they throw out the high and the low score
and use the middle score to determine your credit rating.
When you get your Free Credit Report you will only be given a
credit report pulled from one of the agencies and so you have a
pretty good chance of being misled as to what your actually
credit score is. Unless, the credit agency that was used just
happened to be the one with the middle credit score you won't
have your 'true' credit score. And the reason this matters is
because the difference between the three scores can be
significant. So be wary of single agency credit reports and when
applying for a loan always ask for your middle credit score
because that's the only one that really counts.
About the author:
Kevin Erickson is a contributing writer for: Debt Management and
Credit Card Debt and
Debt
Consolidation. This article may be reproduced only in its
entirety
Written By: Kevin Erickson