The importance of a borrower’s credit score cannot be understated. An individual’s credit score can determine whether or not a loan is approved, the levels of the interest rates associated with that loan, and the amounts that can be borrowed. Credit scores are maintained by the various credit bureaus. These bureaus are private companies who have built a track record of following consumer credit histories. Experian, Equifax, and TransUnion are the leading credit bureaus today. By law, a free credit report can be requested annually from each of these credit bureaus. However, you can consult Your Personal Financial Mentor as well to get a clear understanding of the importance of credit score and how credit bureaus work.
The credit score most commonly referred to is the FICO score. The exact formula used to arrive at the FICO score is not publicized. However, it is public knowledge that the score can range from 300 to 850, with 300 being the worst possible credit rating and 850 being the best possible credit rating. Your free credit report will show your FICO score. A credit score is like a grade point average related to your credit worthiness. Individuals with a long history of timely payments will have high credit scores. Other people who have missed payments, been late, or defaulted on loans will have lower credit scores. Bankruptcy can also cause a credit score to plummet. A low credit score tells a potential creditor that the borrower is risky. Creditors utilize this knowledge by including very unfavourable terms with the loan, requiring a co-signer or guarantor, or by simply denying the loan request outright. On the flip side, creditors compete for borrowers with good credit histories evidenced by high credit scores. These borrowers can receive much more favourable terms, including lower rates and higher borrowing limits.
In addition to banks looking at credit scores prior to issuing loans, many other parties are interested in these scores. Landlords frequently examine a potential renter’s credit score prior to approving a lease. An employer may review an applicant’s credit score as a tool for judging that individual’s character. An insurance company may review an applicant’s credit score to calculate the monthly premiums. Even some utility companies are interested in the credit scores of their customers. With credit scores being so critical in so many different areas of one’s personal as well as financial life, it is critical that this score be monitored. Mistakes on one’s credit score happen frequently, and they are not that difficult to repair. A simple email or phone call to the credit bureau can help to remove faulty information. With a free credit report being available every twelve months, individuals should take advantage of this opportunity to look over their credit reports and see where they stand.