The Complete Guide to Understanding Your Credit Score

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If you want to master the ins and outs of your credit rating, credit score factors, and credit report, it is important to understand how everything works, and how to analyze and interpret your credit score. You also need to know the techniques to improve your credit score, and how to make corrections to any errors on your credit report as well as prevent and detect possible fraud such as identity theft. Below are details of how these elements determine whether lenders grant you a loan, or not. Without further ado, let's dive into the world of credit.

What are Credit Reports and Credit Scores?

Your credit report is an easy-to-read document that illustrates, or details, your financial situation and creditworthiness. It projects a history of your behavior in financial matters, mainly in terms of credit management. As long as you have never borrowed or granted credit, your credit report remains blank with zero credit score. It is initiated once you are granted your first loan or credit card.

Credit Score Definition

Your credit score is a three-digit number that ranges from 300 to 900. The average credit score is a codified illustration of your creditworthiness. In other words, it shows information related to the management of your credit. Lenders use your credit score to quickly determine whether they should give you a loan or not. In a way, your credit score represents, in the eyes of the lender, the existing risk of loaning you money, and you failing to repay the loan.

Determining the Credit Score

Who establishes and determines your credit score? There are private organizations that collect, store, and communicate credit management information. They are the ones that help to establish and determine your credit score. In fact, they are more commonly referred to as credit bureaus.

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Credit Bureaus

Three major agencies on credit reporting:

  1. TransUnion
  2. Equifax
  3. Experian

Credit reporting agencies and your creditors determine credit scores through various systems, namely Beacon and FICO. The question you need to ask yourself now should be: is my information safe with these agencies? Theoretically, yes. However, identity theft occurs all the time.

Does Your Debts Affect Your Credit Score?

Generally, it is up to lenders to communicate your financial behavior to the credit bureaus in relation to your debts. To do this, they use a combination of a letter and a number. Don't worry, you don't have to have a PhD in finance, or be a chartered accountant to understand these combinations. In fact, it's quite simple, the letter represents the type of credit. On the other hand, the figure represents the date on which you repay your debts.

Errors on Your Credit Report

Perfection belongs only to nature. However, that was before human beings appeared. This is not to denigrate the human race, but to tell the truth. Any human invention, as brilliant as it could be, comes with its share of imperfections. Therefore, updating your credit report is no exception to the rule. It can be tainted with erroneous information which you know nothing about. If you don’t continue to monitor your credit report and someone steals your identity and gets cash loans for bad credit, it will negatively affect your credit score. Hence, it is important to check your credit score and report at least once a year. Tell yourself that this is an annual check-up of your financial health. More specifically, here are the things you need to monitor:

  • Errors in your personal information;
  • Incorrect information in your account numbers;
  • Information that is harmful to your credit report that appears on it despite the expiry of the maximum retention period;
  • Information about the presence of fraudulent credit accounts that you have never requested to be opened.

It is important that you can notice any errors on your file, no matter how small. Indeed, just an incorrect date of birth or a misspelled name is enough to cause you trouble at the time of your application. You should regularly review your credit report to find errors.

Payment History

This is the factor that has the most impact on your credit score. It usually shows the following information:

  • The dates on which you made your payments;
  • Your missed or late monthly payments;
  • Your outstanding debts whose creditors have either written off your accounts or sent them to a collection agency.

As you will have understood, you are dealing big blows to your credit score, and therefore your credit report by taking the following actions: if you make your payments late, make several credit applications, declare bankruptcy, file a proposal, and have accounts that are sent to collection agencies.

It is important that you keep in mind how essential it is to make payments on time. If you do not respect your payments and especially if your creditor transmits your account to a collection agency, your credit score suffers.

Conclusion

Be sure to meet all your repayment deadlines. If the conditions are not met, make the minimum payments. There may be cases where you know in advance that it will be difficult for you to pay before the due date. If such a scenario arises, communication with your creditors is key. Try to see if you can make any special arrangements for the situation. Remember that it is the creditor transmitting your information to the credit bureaus, and so it is best to keep a civil and communicative relationship. If you want to know more about how to manage and monitor your credit score, visit Goalry and go directly to their Creditry store.

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