Are you confused about your credit score? If you are, then you may want to pay attention to this article because we will try to give you some of the basic credit score education that you need.
A consumer’s credit score is taken from their credit report. This report holds vital information about you. It shows a list of your credit accounts plus any good and bad behavior that you have displayed. In fact, that is the whole purpose of your score. It says a lot about your credit behavior. It is a number that represents your debt situation and how you rank at managing it. Simply put, when you are in a bad financial situation, chances are, you have a low credit score.
People usually encounter this score when they are trying to apply for a new credit account. Lenders and credit card companies will always check if a consumer is a responsible credit holder. Anyone who will let you borrow their money will naturally be interested in how you will pay it back. It does not matter if you have the income to pay your dues. Some people borrow money and forgets about it. This is something that lenders and creditors want to avoid.
Apart from loans and new credit accounts, employers will also look at your credit score before hiring you. Utility companies and even landlords can use this information to check out your credit behavior. These inquiries about you makes credit score education all the more important.
Study shows a lot of consumers do not understand credit scores
Unfortunately, everyone may know about credit scores but not all of them fully understand it. An article recently published by CNN.com discussed a survey done by VantageScore – one of the providers of credit score information. Apparently, lenders follow the Dodd-Frank Act by providing consumers with a disclosure notice to explain a credit application disapproval, but most consumers do not understand it. These reasons could include a current delinquent account or too many credit inquiries, but consumers have no idea what all of these mean so they fail to take the steps to help improve their score.
VantageScore surveyed 200 lenders and it revealed an increasing need for credit score education. The highlights of the survey as mentioned in the article includes the following:
75% of lender participants are concerned that their clients do not understand what is written in disclosure notices.
10% of lenders think their customers understand the disclosure notice “reason codes.”
10% of lenders do not have a Spanish translation for their disclosure notice.
38% of lenders are willing to help provide applicants with tips to help improve their credit score.
33% of lender believe that a clearer and simple language will help make disclosure notices more understandable.
A separate survey, that is a joint effort of VantageScore Solutions and the Consumer Federation of America (CFA), revealed that a lot of consumers know very little about credit scores. The survey results as published on the ConsumerFed.org and it showed the following information:
⅖ of consumer respondents are not aware that credit card companies and lenders refer to credit scores when it comes to making decisions about pricing and approval.
⅖ believe that age and marital status influence credit scores.
¼ to ⅓ of consumers do not know that they have the right to be informed of the reason for credit decisions (loan disapproval, interest rates, etc).
⅓ to ⅖ of respondents are not aware that even the credit score of co-signers can be affected by student loans.
¼ or more of respondents do not know how to improve or keep their credit scores from declining.
⅓ of consumer respondents are misinformed about credit repair agencies.
All of these statistics prove that more than ever, consumers should take time to get credit score education. You need to learn how to utilize this so it will not have any effect on any financial opportunity that comes your way in the future.
Here is a video from National Debt Relief that discusses why credit scores are important and how it can affect your plans to refinance your home.
Important credit score concepts you need to know
Now that you understand why credit score education is needed, let us discuss the basic concepts that you need to learn. If anything, this information will help you fix your credit score fast – or at least, in time for you to keep it from ruining financial opportunities that will come your way.
Here are 5 things about credit scores that you need to know about.
What is a credit score?
A credit score is a measurement of a consumer’s credit worthiness. As mentioned, it depends on your credit report. The data found on this report is a compilation of all your credit information from the various credit and financial institutions that you have transacted with. The three major credit bureaus (TransUnion, Experian and Equifax), compile this information and put it on your credit report.
A credit score range will depend on the company behind it but the average is from 300 to 850. A high credit score indicates that you are creditworthy while a low credit score would raise warning bells for lenders.
How is your score computed?
The exact formula to compute your credit score will vary. Fico Score and VantageScore, for instance, will compute your score differently. But all of them will base your score on your payment history, debt amount, credit history, new accounts, and type of accounts. These are the 5 important factors affecting your credit score.
Based on the FICO Score, the payment history affects 35% of your score. When you have a late payment, this will be affected. The next part is your debt amount – which is 30% of your score. When you have a high debt amount, this will suffer. Your credit history is 15% of your score. The older the account, the higher your score will be. The fourth involves new inquiries – which is 10% of a credit score. When you apply for a new loan and the lender looks at your credit report, that can affect your score negatively. The fifth also affects 10% of your score and it is the type of accounts that you use. The more variations, the higher your score will be.
Who looks at your score?
The majority of the people who will look at your score includes lenders and credit card companies. If you plan on transacting with any of them, you need to brush up on your credit score education. They make up the majority because you are borrowing money from them. Other viewers of your score includes employers, landlords, insurance companies and utility companies.
How to check credit scores?
If you want to take a look at your credit score, you need to get a copy of your credit report first. You can get a paid copy from one of the major credit bureaus or you can download a free copy from the Annual Credit Report website. The government mandates the three major credit bureaus to provide consumers with a free copy of their report every year. That means you get three free copies annually.
Once you have your credit report, you can proceed to search for a credit score calculator. There are many free calculators online – just make sure you will go with a site that is trustworthy and secure. Simply input the data in your credit report to get an estimate of your credit score.
What happens when you have a bad credit score?
Probably the most important question in credit score education is what will happen when you have a bad score. It really depends on who will look at your score. A bad score would mean higher interest rates from lenders and credit card companies. It will not really mean a disapproval – unless your score is really very low. For landlords, they may keep you from leasing their place or they will get a higher rental deposit from you. For employers, a bad credit score can cost you a job. For insurance companies, it can mean a higher premium payment. For utility companies, it can be the same as the landlord, you could be asked for a deposit.
Nothing is wrong with keeping your credit score high so you might as well try to take care of it. Start by learning more about it through credit score education. Added knowledge will never put you in a bad light.
Diana hates debt just as much as you do. She is a finance writer for National Debt Relief. She aims to provide the best information to win the battle against debt.