Credit Scores
Credit grantors use credit scoring systems to analyze and decide if you are a good risk candidate for credit cards, car loans, and mortgages. Phone companies and companies that sell auto and home insurance also use credit scores along with other factors to decide whether to sell you a policy or service. Credit scores can also affect the credit terms you are offered. Having a higher credit score means that businesses perceive you as someone who poses a less financial risk, which in turn means that you are more likely to get credit or insurance or pay less.
What is a credit score?
A credit score is a number that represents a rating of your level of likelihood of repaying a loan and your timeliness of repaying it. Lenders calculate your credit score using information from your credit report, such as your payment history for the money you borrowed, the types of loans you got, how long you kept a particular line of credit or loan, and what it is. the total amount of your debts. Each credit scoring system calculates your score differently, but the credit scoring system most used by most lenders is the FICO score. Various types of businesses use your credit score to decide whether and on what terms they will extend credit to you. That includes what interest rate you will pay to borrow money.
How can I find out my credit score?
Unlike your free annual credit report, there is no free annual credit score. A credit reporting company may give you free credit scores. Other companies might give you a free credit score if you sign up for their paid credit monitoring service. These types of services check your credit report for you. It is not always clear if you will be charged for the credit monitoring service. If you see an offer of free credit scores, review it carefully to find out if they are charging you for credit monitoring.
Is it important that I get my credit score?
Before you pay to get your credit score, ask yourself if you need it. Your credit score is based on your credit history data, meaning that if you know that you have a good credit history you already know that your credit score will be good. You may be interested in knowing your score, but you can decide if you want to pay to get it.
Typically, your credit score will be between 300 and 850.
- A high score means that you have “good” credit, which means that businesses think you are low financial risk. With a high score, you are more likely to get credit: a loan, credit card, insurance, or pay less for that credit.
- A low score means you have “bad” credit, which means it will be harder for you to get credit. With a low score, you are more likely to pay higher interest rates when you get credit.
Some insurance companies also use the information in your credit report, along with other factors, to help them predict the likelihood that you will file an insurance claim and the amount of your claim. Insurance companies may consider this information when making the decision to issue insurance and determining the amount of the premium. The credit scores commonly used by insurance companies are sometimes called “insurance scores” or “credit-based insurance scores.”
What is the relationship between my credit report and my credit score?
Credit grantors use your credit score to decide whether to grant you credit and what terms they will offer you, particularly to decide the rate you will pay for the money you borrow. Your credit score is calculated based on the information in your credit report. Your credit report, which contains your payment history and information about your debts, is a key part of many credit scoring systems. That is why it is so important that you make sure your credit report information is accurate. Federal law gives you the right to get one free copy of your credit report from each of the three nationwide credit reporting companies every 12 months. Until the end of the pandemic, all people living in the United States. Can get one free credit report per week from the three nationwide credit reporting companies (Equifax, Experian, and TransUnion)
What if I am denied credit or insurance, or I don’t get the terms I want?
Under federal law, certain characteristics, such as race, gender, marital status, national origin, or religion, cannot be used as factors in determining whether to grant you credit in a credit grantor scoring system. The law allows credit grantors to use age, but in any credit scoring system that includes age, older applicants must be treated the same.
You have the following rights:
Find out if your application was accepted or denied within 30 days of submitting a properly completed application form.
Know the reason why the credit grantor rejected your application. The grantor must:
- Inform you of the specific reason you based on the denial of your application (for example, “your income is too low” or “you have not been at your job long enough”).
- Or tell you that you have the right to know the reasons, if you request it, within 60 days.
Know the specific reason why the provider offered you less favorable terms than those listed in your application, but only if they deny you those terms. For example, if the lender offers you a loan for a lower amount or a higher interest rate and you do not accept the offer, you have a right to know why they offered you those terms.
If a business denies your application for credit or insurance (or offers you less favorable terms) because of the information in your credit report, federal law requires the business to do the following:
- Send you a notice that includes, but is not limited to, the name, address, and telephone number of the credit reporting company that provided the information.
- Include your credit score in the notice if that credit score was a factor in the decision to deny you credit or to offer you less favorable terms than most customers get.
If you receive one of these notices:
- You have the right to receive a free copy of your credit report from the credit reporting company that was used to review your credit report.
- To find out what information may have caused you to be denied credit or the most favorable terms, contact the credit grantor or insurance company. The credit reporting company can tell you what is on your report, but only the credit grantor or insurance company can tell you what happened to your application.
- If your credit grantor or insurance company says they denied your application for credit or insurance or denied you more favorable terms because you are too close to reaching your credit card credit limits, it is recommended that you reapply. after paying your balances. Credit scores are based on information in the credit report, so the score often changes when the information in the credit report changes.
If a credit grantor or insurance company denies your application due to an error in your credit report, be sure to dispute the inaccurate information with the credit reporting company and the business that supplied the inaccurate information.
What can I do to improve my credit score?
When you receive your credit score, you may receive information on how you can improve it. It may take a while to improve your score a lot, but it can be done. In most scoring systems, you have to focus on paying your bills on time, paying outstanding balances, and avoiding incurring new debt.
How does a credit scoring system work?
Credit scoring systems are complex and can vary for different types of businesses. Some systems may consider additional factors or weigh the factors differently. But in almost all of the ways used to calculate your score, the following types of information from your credit report are considered:
- Have you paid your bills on time? If your credit report shows that you have paid your bills late, that any of your accounts were taken for collection, or you have filed for bankruptcy, your score is likely to be adversely affected.
- Are you on the edge? Several scoring systems evaluate the amount of your outstanding debt against your credit limits. If the amount you owe is close to your credit limit, that is likely to hurt your score.
- How long have you had credit? In general, scoring systems consider the age of your credit record. Short credit history can hurt your score, but this can be counteracted if you show that you are making your payments on time and maintaining low debt balances.
- Have you applied for new credit recently? Various scoring systems look at the “inquiries” on your credit report to see if you have recently applied for credit. If you have applied for too many new accounts recently, this could hurt your score. Not all inquiries are taken into account: for example, inquiries from credit grantors monitoring your account or making “shortlisted” credit offers will not be used against you.
- How many and what type of credit accounts do you have?
Although having established credit accounts is generally considered an advantage, having too many credit card accounts can hurt your score. Additionally, various scoring systems take into consideration the type of accounts you have. For example, for some scoring models, loans to consolidate your debts, but not loans to buy a home or car, can hurt your credit score.
Credit scoring models compare this information with the credit behavior of other people with similar profiles and assign a score to it. These scoring models may use the information other than your credit report information. For example, when you apply for a home loan, the system may consider factors such as your down payment amount, your total debt, and your income, among other things.
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