What is a credit score and how do you access them? For many, and possibly most of you, your credit score will not impact your day-to-day life. However, the world of credit scores and financial analysis is a complicated and highly specialized business. The most important point, which you must keep in mind, is that in order to make an informed decision about your finances, you must get a clear view of your credit situation.
Credit scores are used by lenders, insurers and other organizations that manage your credit and can be checked and updated over the internet by interested parties. Credit scores can also be checked by yourself online or, if you need help, you can ask a licensed and experienced credit or finance expert. So, whether you are a consumer or a business owner, you should know how to obtain a credit score and start using it as part of your decision-making process.
Just a few words about how a credit score works
Before we start, let me briefly explain how a credit score works. The average customer scores about 680 on the 100-point scale and with a single credit inquiry (usually resulting from a bank loan) scores over 900 points. As you can see, credit scores are often related to one’s income and the credit level of our previous customers. However, there is another level of complexity, which is known as an individual’s FICO score. It includes a number of factors and is calculated differently from the normal, or FICO score.
The scores range from 300 to 850, with 300 being the lowest. The greatest credit risk (a score below 550) is a result of a credit dispute or many open credit accounts. While a score of 600 may be considered a good risk level, the situation with a score of 300 or below is quite desperate. Banks have to take a good look at your credit report before offering you a loan and many borrowers report problems with lenders. If your credit report is not ideal or contains a string of errors, you may be refused a loan.
There are two reasons for this.
- First, no one wants to lend money to people with bad credit ratings.
- Second, with a low credit score, you are at a greater risk of being turned down for other loans in the future.
The bottom line is that a credit score can be extremely valuable and even in the worst cases, is often the deciding factor when you are seeking a loan or your application is rejected.
The best way to get your credit score
The best way to get a credit score is to have a well-known service such as CreditKarma and it will provide you with a free report, once a month. The CreditKarma site offers several useful tools that will assist you to monitor your credit situation and it will even provide you with a report on how you compare to the rest of the world.
CreditKarma has the following advantages over the banks:
- No direct involvement. CreditKarma runs your credit report and it provides you with your credit score based on the information provided by your credit bureau. Banks can be involved, and this can give them an unfair advantage over their customers.
- No bidding. Banks are allowed to bid for your business but they can also raise your credit score when you are looking for a loan. This happens when you make a number of credit applications and your score drops from 400 to 400. If you bid for a loan and make a number of small, small repayments it may cause a big jump in your score.
- No interest. If you are a customer of the lending institution, you will be charged interest every time you make a payment for a loan. It is paid by your lender and then passed on to the client. This adds a large amount of confusion and chaos to the entire transaction.
- Simple. All you need to know is your current status in credit, details of your current or previous accounts and your score. No need to know anything about the lending institution or anything about other banks you may be dealing with. You just have to know your current score.
How to increase your credit score
The general rule is that if your credit score is below 780 then it’s not advisable to get any credit. Your score can be helped by:
- Lending against existing assets. If you are a homeowner, this is a good opportunity to build your score by borrowing against the value of your house and paying this back as soon as you have repaid it. This has the advantage of not adding to your current debt burden, as well as improving your credit score. It can also build your house and possibly the value of your house as well. If you are renting, this is an excellent opportunity to increase your credit score and improve your chances of getting a mortgage one day. A good rent payment and a good mortgage statement can do wonders for your credit score.
- Pay down debt. Any debt that is not paid off can harm your credit score. Although this is not a very large factor in the modern world, it is still worth a good deal. Paying off your credit cards, for example, will improve your credit score. It will also make you feel better and it will improve your situation.
- If you are a paying customer of any of the large lending institutions, they can do your credit score. Most of them give you access to the reports, but there are some that you can pay a fee to get your credit score updated. Even if you are not able to have your credit score improved directly, your general credit health is important.
- Having a low credit score can make it more difficult for you to get a loan, and if you already have a loan, it will impact your chances of getting a new loan and the interest rate you will pay. If you have a higher credit score and pay your bills on time, you will have a much better chance of getting a loan with a lower interest rate and an acceptable length of time before the loan is paid off.
It is recommended that you have a credit check before applying for any loan. This ensures that the bank knows your current financial position, as well as the condition of your credit score.
What else do you need to know about credit scores?
There are other things that affect your credit score such as:
- Outstanding student loans
- Moving house and job
- Dealing with debt collectors
- Anything that is in your credit report that you have not resolved
How can you resolve credit problems?
For most people, the first step is to check your credit score. It is also a good idea to check it if you think your credit is not correct or if you are about to apply for a loan. Most credit bureaus offer this service, as do some of the other institutions which offer credit checks. You can get a free copy of your credit report from AnnualCreditReport.com. If you believe that your credit score is not correct or if you know that you have done something that has damaged your credit then you have a few options:
If you believe that your credit score is not correct, then you may have a dispute. You may be able to get the credit bureau to investigate your file. To resolve this, you will need to make a copy of your credit report and send it to the credit bureau along with copies of any documentation. It will then investigate your case and work with you.
The report will also ask you for documentation to support your claim. You will be asked to supply:
- The original payment
- A copy of the written agreement
- An acknowledgement from the account holder
- An apology letters
If your report says that you have a dispute, it will also ask you for information on the incident you think was damaging your credit. These questions include:
- What date was the error?
- When was the error made?
- Who made the error?
- What did they do about it?
- What action was taken by you?
The answer to these questions will help the credit bureau to better understand what happened. It will also determine what you can do about it. You can consider the following:
- If you believe that you have had some sort of fraudulent activity on your credit file, you will need to make a police report. This is not the same as a credit report dispute and involves the police investigating and prosecuting the perpetrator.
- If you have been through the process of making a police report and there is no fraud, then the credit bureau will take this into account when deciding on your credit score. It may even reduce the size of your credit limit, but it will not affect your actual credit score.
- If you think that the credit bureau has made a mistake then you should still follow through and try to resolve the matter.
- Help.gov also offers other helpful information on improving your credit scores.
- If you’re in financial distress, you could consider speaking to a credit counselor for free.
- When making a police report, check that you do not need to notify your bank or credit card company.
- If you are not confident with how to get the information you need from a police report, speak to a credit counselor for free.
- If you suspect that you have the wrong information on your credit report, you may be able to have your credit reports corrected. This may also be the case if you need to report a lost or stolen credit card.
- Even if you have had some sort of dispute, you may be able to improve your credit score by simply trying harder. Take on more responsibilities, make a payment on time or simply put your name down as an authorized user on another person’s account.
Many of the lenders which you need to apply for credit will ask to see a credit score before extending you credit.
If you have any of the following, it’s recommended that you check your credit report:
- Interest rates on credit cards and credit cards (which vary according to your credit profile)
- Interest rates on loans, personal loans and car loans (which are generally less than credit card interest rates)
- Unpayable balances on credit cards
- A bad debt ratio (bad debt has to be greater than the borrower’s income)
- Too many missed payments
- Too many payments reminders
Remember, if you have been a victim of fraud or identity theft, contact the organization directly to report it. In the majority of cases, you will need to take action to protect yourself against fraudulent activity on your credit files.
Credit score: Providers use a numeric score that is between 300 and 850 (high scores are good). You may be asked to take a simple online test and if you score high, you may be given credit for taking action to improve your credit score. Creating an effective credit score is an investment, and one that you should put some thought into. Your credit score will improve and you will enjoy a boost in your creditworthiness.
You should see improvements over time, with more accuracy. Even the smallest changes could have a massive impact on your life. For example, a few simple improvements could make a huge difference. Your score could go from a low 550 to a high 700 if you use cash more, pay utility bills on time and pay your credit cards off in full. Some even say that a few simple steps can cause your credit score to double. Use a simple credit score calculator to find out your credit score.