What is credit score? And how does this affect your finances?
Credit score refers to the number that indicates one’s creditworthiness, taking into account past financial activities. It comes in a three-digit number that ranges from 300 to 850. The higher the number, the more financially trustworthy a person is. This is what lenders and credit card companies look at to determine whether a person is likely to repay his debts or not.
The Fair Isaac Corporation (FICO) devised a standard credit score model. The FICO score is what’s most commonly utilized by financial companies and institutions for determining the credit scoring system. Some mortgage and insurance companies also have their own credit scoring systems.
Since the credit score affects the decision of lenders, this is a big factor in the success of your loan or credit card application. This is why, it’s very important to maintain a high credit score.
How do you make sure of this?
First, you must ensure the accuracy of your credit reports.
Credit reports are issued by three credit bureaus namely: Equifax, TransUnion and Experian. While these bureaus do everything they can to ensure accuracy in the credit reports that they release, it’s still possible for mistakes to occur.
In 2012, the Federal Trade Commission conducted a study and discovered that 1 in 5 people had at least one error in their credit reports. Since the credit score is based on these credit reports, it’s imperative that you take the time to ensure that these are accurate.
Under the Fair Credit Reporting Act, you’re entitled to a free copy of your credit reports, which you can access through the Annual Credit Report website. Once you get hold of the credit reports, ask yourself the following questions:
- Are your personal details including full name, address, birth date and Social Security number correct?
- Are all your credit account included in the report?
- Are there any reports of late payments that are not true?
- Are there credit accounts in your report that are not yours?
- Are there debts or loans that have already been resolved that still appear on your report?
If you spot any error or inconsistency, be sure to report these to the bureau right away. You can dispute the errors yourself or enlist the help of a credit repair company.
Here are other ways to improve your credit score:
- Pay on time. Put payment due date on your planner so you don’t miss them.
- Organize your finances. See to it that you have the money to pay your debts on time.
- Pay off your debts instead of moving them around.
- Learn from your old mistakes and improve your financial planning.
As you can see, a good credit score is an indicator of financial health. Improve your credit score by checking the accuracy of your credit reports, paying on time and organizing your finances.