There is nothing wrong with credit as such. It is has been the means by which many of today’s huge multinationals developed. In the form of mortgages it is the main reason why a real estate market was able to develop at all. The problem comes when people obtain credit that they are unable to manage or repay. Whether they have provided inaccurate information at the time of application, whether their circumstances have subsequently changed or whether the lender was too lenient in approving a loan, the end result is still the same. Failure to make suitable repayments has two main consequences; the borrower’s credit history and thus credit score will be damaged and the lender is out of pocket.
Understand Credit Score Before Taking a Loan
Everyone should understand their credit score; where it comes from and what factors affect it. The score comes from a calculation of the details, typically made by FICO, a software company originally called Fair, Isaac & Company, the two founders, contained in the individual’s credit history. That information will include payments that are made on time as well as those where they were late or not paid at all. The information is gleaned from credit reports and obviously everyone should ensure that all the good news is transmitted by the recipient to the three main agencies producing the reports, Experian, Equifax and TransUnion. It is possible that one or more of these agencies will not have some detail that another includes and hence it is possible to have more than a single score.
They are intended as a guide to bad credit lenders who need to judge whether an applicant for a loan is likely to make timely and complete repayments. One interesting thing that many do not realize is that if a person has multiple credit cards with little in the way of balances but sizeable credit limits that will be regarded as a positive because in theory the person has a good deal of available credit. It is an important reason not to actually cancel a credit card as that will reduce ‘available credit’ even if there is no intention to use it.
Everyone is entitled to a free copy annually and it is certainly something everyone should ask for if only to ensure that there are no negative inaccuracies affecting the score.
It is important to realize the number of different bodies who will look at an individual’s credit score to form a judgement about that person. It will include insurance companies who want to make an assessment of the likelihood of someone making a claim. It is also sometimes used by companies interviewing that individual for a job. These are perhaps two lesser known uses of a credit score that illustrate the breadth of its power. It means that there are a number of different credit scores per person calculated by extracting particular data but ignoring other based upon the reason why a company wants it. One constant is of course the higher the score the better.
There is no implied criticism of someone checking their score. It is not assumed that the person involved fears about his or her status. However people may be adversely affected if they ask potential lenders to check their scores because that puts doubt into the minds of reporting agencies that a check is necessary.
The score is intended to be a current reflection of the position. The older the information the les importance will be placed upon it until it finally drops from the history after seven years. Bankruptcy stays on a current history for ten years incidentally.
There are ways to repair a credit history and the most common is to make repayments on time and ensure that the company involved is sending that information to the agencies. Take for example the scenario where a person has a credit card debt and is regularly missing the monthly payments and is up to the agreed credit limit. If that person approaches an online lender for a consolidation loan to pay off the balance, he or she is likely to be approved if there is a regular income and the apparent ability to make the repayments. A poor credit score may involve a higher rate of interest but it will be much lower than that being charged by the credit card company. If the balance is paid off and the company still allows a usable credit limit that is a positive for the credit score. Every successful repayment instalment is as well.
Certainly it will take a little time but it is worth the effort because of all the aspects of life where the score is used almost as a reference. It is important to be in control and having a good credit score and maintaining it certainly helps to provide that control.