10 Things You Should Know About Credit Scores
You hear about it all the time
But do you really know what it is? Read ahead to find out several important facts regarding this number:
1. Credit Scores (CS) and Reports (CR) are Not the Same Thing
A report is a detailed history of your finances, such as how much money you have borrowed and how many credit cards you have. The score is calculated based on your financial history, namely your payment history, utilization and age of credit. The score appears on your report.
2. There are Different Types of CS's
There are number of companies out there offering services to calculate CS based on different formulas. The most widely used and accepted of these is the FICO. The FICO formula can assess a person's credit history and generate a number ranging from 300 to 850. Higher scores mean the borrower is less risky. VantageScore is another company that issues CS's, but using a different mathematical model. They give numbers from 501 to 990, and as with FICO, a higher number means more creditworthiness.
3. CS Matters to Lenders
Lenders consider you CS before issuing cash loans. If you have a higher score, you are more likely to be issued a loan. However, CS isnt the only factor that goes into loan approval. Your income, for example, is also carefully scrutinized by lenders. A good CS can help you get a loan if your income is too low or unstable. On the other hand, a bad CS could be overlooked if you have steady source of income.
4. CR's arent Free
You can obtain a CS for free online. However, this will not include your CS. You will have to pay about $8 to get an accurate number. Some website offer "free" estimates of FICO scores. Be careful of the word "free" here. It usually means you have to sign up with CR agency or agree to a trial offering if you want to view your CS.
5. You CS Changes Overtime
These are not static numbers. They change as your financial history changes. If you cancel a credit card, pay off the balance of a debt, or incur more debt, your CS will change accordingly. So if it is low right now, don't be discouraged. It can be improved in the future with some careful planning.
6. Credit Cards Matter Even After Cancellations
If you cancel a CC today, it will not disappear from your credit history anytime soon. Canceled cards continue to age and do affect a person's CS for years. If your card was negative upon the time of cancellation, the bureau will delete the card after 7 years. If not, the card will appear in your history for 10 years.
7. Bureaus Make Mistakes
Credit bureaus are not free from making mistakes that can adversely affect your CS. Therefore, you should routinely review the history that appears on your CR. Make sure personal information and the cards mentioned are correct.
8. Public Records are Used to Calculate CS
Some of the financial history agencies use to calculate your CS is based on public records. For example, if you have ever been sued for not paying back a loan, or if you have been taken to court over not paying child support, these factors would negatively affect your CS.
9. Joint Accounts Affect CS
If your funds have been in a joint account, it will be reflected in your individual CS. Its not possible to separate joint accounts from the ones you are solely responsible for. If your joint account runs into a negative because of the other person, that will hurt your individual CS. Therefore, have a clear set of financial responsibility rules for each party before signing up for a joint account.
10. CS Can Spot Scammers
If you CS suddenly goes down and you have no idea why, that usually means someone else has been using your accounts to spend or borrow money. Keep an eye on fluctuations to your CS that may not be caused by your spending and borrowing habits. As your CS reflects your credit history, its easy to know if an identity thief is using your name to borrow large sums.
Watch this video for even better understanding:
CS's can affect how much money you can borrow or how much you have to pay as interest. Therefore, do not regard this small number trivially.