Every time you apply for any type of loan or you have issued a 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 the 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 its own guidelines and in many cases, it will cause a negative impact for 2 – 3 years. Owing to 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 creditworthiness with a number. FICO was named after the Fair Isaac Corporation, who invented it.
One common misconception about a 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 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 of 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 the 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 be misleading.
The reason it’s misleading is that 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 matter 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.