The Transformative Impact of a Credit Report

At one time or another, you likely will come across a moment where you will need to borrow money. You may need a loan to finance a major purchase such as a house or a car, or even to finance a business. In every case, good credit worthiness serves as a pivotal component in the process in determining whether the loan will be approved. In order to determine your suitability for a loan, a lender must estimate the level of risk by reviewing your credit report and overall financial health.

Whether you are a first-time homeowner or are looking to refinance your vacation house, your credit report is essential for achieving your financial objectives.

Below is an explanation of how your credit report works and what you can do to create the best picture of your credit worthiness.

How Your Credit is Calculated

There are three main credit bureaus in the economic landscape - Experian, Equifax and TransUnion - who utilize calculations to determine the credit rating/worthiness of consumers throughout the country. These bureaus evaluate a consumer’s debt-to-credit ratio, credit activity, the length of time for credit relationships and payment histories.

Credit reports prepared by the three bureaus may include also tax liens, court judgments or any legal actions related to the finances of the person. Among other sources, credit bureaus depend on financial institutions companies, credit card companies and banks. It will be possible to generate a report, providing you have had at least one credit account open and active for more than six months.

FICO

In a credit report, individuals receive a 3-digit FICO score. Potential lenders view FICO scores provided by these bureaus very seriously. The highest FICO score, demonstrating a prime borrowing candidate, is 850, while the lowest score for subprime borrowers lies at 300. FICO scores are also checked by insurance companies and these scores can influence the lending decisions of banks. These scores also can affect eligibility for certain types of employment. This methodology of credit rating was started by Fair Isaac Company, where the name of the score originates.

The FICO score alone will not green light a loan for individual, although they are widely used to determine credit worthiness. Lenders are free to assess the financial situation of the borrowers using points which are not mentioned in the candidate’s credit report. Some of the lenders also may take into accounts things such as employment history, salary, outside assets and personal factors in making a loan approval decision.

Benefits of High Credit Ratings

To secure a high credit rating, be sure to pay your bills on time and avoid borrowing too much money to keep your debt-to-credit ratio levels healthy. A strong subsequent FICO score can make all the difference in saving you significant amounts of money in terms of the interest rates you pay on home, car and personal loans. In other words, the higher your FICO score, the lower your interest rates for borrowing whether it be for cars or houses.

Managing Your Credit Scores

Each year be certain to take advantage of your legal right to access a free copy of your credit report from the three major credit bureaus. Your right to access the report is not at all influenced by credit decisions made on any loan applications you have submitted. It’s prudent to check your report and subsequent score, as errors often appear that consumers are unaware of that affect their ability to borrow money at low interest rates. Moreover, if you are denied credit, you have the right to obtain a free copy of the credit report that the lender used from a given credit bureau.

Remember that your credit report is a living document that changes as your life circumstance change. Be vigilant in observing your report for its accuracy, as it may prove transformative in making your ability to secure favorable loan terms a seamless process.
Whether you or someone close to you is seeking to boost their financial prowess and profile, your credit report is the primary component in determining your attractiveness to lenders and institutions that can optimize your life.

 

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