What Is The Importance Of My Credit Rating?

Calculator and graphing paperYou are surely aware that the three major credit reporting agencies (CRAs), also known as the credit bureaus, have a lot of power over whether you can get financing for vehicles, homes, and other credit transactions.  But you may not know how the CRAs get the information for your credit report, or what your credit score really means.  Since consumer credit history, scores, and reports are extremely important in your life, you need to make sure that you understand them and what you can do about them if they are not reporting accurately.

When you apply for credit, the potential lender goes to the three main credit bureaus, (Equifax, Experian, and TransUnion), to review your credit report.  There are many other CRAs as well, but these three have emerged as the primary sources of credit reports.  Your credit report contains information about your bill payment history, current loans and debts, and other financial information.  It usually also states your current address and the name of your employer, as well as past addresses and employers.  Finally, a credit report may include whether you’ve been sued in the past or filed for bankruptcy. Negative information about you can stay on your credit report for seven to ten years.

Of all the information contained in your credit report, there are five key facts that generally are used by potential creditors to determine your creditworthiness when you are applying for a loan, mortgage, credit card, or residential lease: 1) your payment history, 2) the types of accounts in your credit file, 3) the total amount of debt you have, 4) how long you’ve had the credit, and 5) the number of hard inquiries that appear in your credit file.

With this information gleaned from your credit report, the lender can decide whether it wants to provide you with credit or approve a loan, and what interest rate it should charge you.  Further, prospective employers, insurance companies, and landlords may also review your credit report to see if they want to do business with you.  In other words, the credit reports prepared by the CRAs allow potential lenders to see what type of risk they’d be taking if they extend you credit, and potential others to see if you appear to be the kind of person with whom they wish to transact business.

About The Credit Reporting Agencies

The three main CRAs are privately owned, for-profit companies rather than being owned by the government. They have reporting relationships with the banks, credit card companies, and other financial lenders you have worked with in the past to provide them with the information to compile your credit history into a credit report.  The CRAs then charge the potential lenders who request a copy of your credit report, which is how they make their profit.  Since they are private companies, the CRAs work independently of each other, so they don’t communicate or share information.  That’s why your credit file from each of them might be slightly different from the other two, and why it’s a good idea to review reports from each of them regularly.

You are entitled to one free credit report from each of the CRAs every twelve months. You can request all three at once, or space them out over the year. If you should need more than one from a particular agency within a year, they will charge you a fee.  Two of the CRAs, Equifax, and Experian, will most times send you a report that includes all three of them.  Unfortunately, all too often, the CRAs mess up someone’s credit because they don’t have their facts right, or they may even be reporting someone else’s credit history under your name!  Therefore, you need to protect yourself by going over your credit report carefully on a regular basis.  If you find errors on your credit report, you should write a letter disputing the errors and attaching any supporting documents you have, and send it directly to the CRA, as well as the information provider (bank, credit card company, or whoever provided the CRA with the inaccurate information).

As you’ve likely figured out, the information in the credit reports is used to determine your three-digit credit score.  Since the information held by each of the CRAs can vary somewhat, your credit score according to each may vary as well.  Further, there are several different credit scoring models or formulas depending upon who’s doing the scoring, and even for what kind of credit you’re applying for.  You’ve probably heard of a “FICO” score before — in reality, you don’t have just one FICO score, you have several.  FICO scores typically run from a low of 350 to a top score of 850.  (Very, very few people get to the 850 range!)  The higher your score, the better risk you are considered to be for credit purposes.  However, your FICO score is not the end-all feature in determining your ability to pay your debts.  In fact, people who pay for things in cash don’t even generate FICO scores.  So while your FICO score will be helped by paying your debts on time and limiting the sum total of those debts, the financial responsibility you will be practicing is also a bonus when you are looking to borrow money for such things as mortgage loans.

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