Maintain_a_Good_Credit_Score

Maintain a Good Credit Score Credit bureaus use information on file to determine one’s credit score. Activity contained in the files provides a current status of one’s credit history. Credit scores are a fair measure to help lenders estimate potential risk. The three main credit bureaus are Experian, TransUnion, and Equifax. Credit scores are similar to grades received in school and range from 300 to 850 points (Consumer Reports, 2005.) As one would not want to have a failing grade in school, they would not want to have a failing credit score. The scores that credit bureaus issue are called FICO scores. FICO stands for Fair Isaac Corporation and is the company that developed the scoring system. The system was designed to give lenders a quick look at a potential borrower’s creditworthiness (Fair Isaac Corporation, 2001-2010.) Bureaus use information collected from credit card companies and banks. The three organizations look at the debt that is owed as well as the payment history of the consumer. They also check public records to determine whether there are bankruptcies or any outstanding taxes owed or any type of tax lien. A credit history tracks everything a person does; whether payments are made in a timely manner; when payments are made, it shows the number of days late one was; every time they apply for credit; and any time a credit account is opened or closed. The main factors used when calculating one’s FICO score are payment history, amount owed (outstanding credit,) length of credit history, new credit accounts opened, and the type of credit one currently has outstanding. In order for financial institutions to remain in business, they must protect their assets by assessing risks; therefore, a good case can be made that credit scores are a fair measure to help lenders estimate potential risks. It is imperative that lenders use credit scores to decide whether to extend credit to someone as well as to determine the interest rate to offer them. Consumers with the highest credit scores will be those that are offered the best interest rates because they have proven credit worthiness. Consumers with lower credit scores will be extended an offer of credit with an extremely high interest rate or may be declined credit altogether for the simple reason that they have shown that paying on time or possibly not at all is highly likely. Credit scores are also used by insurance companies to determine the rates they are willing to offer a consumer. Possessing a flawless driving record alone does not, and should not, guarantee premium rates. Insurance companies are clever enough to know, and have proof that, if someone is irresponsible with their finances, chances of being irresponsible within other aspects of their lives is greater. Utility companies also use credit scores when an account request is made. Companies are justified to require a deposit from those who have low credit scores when trying to activate water, power, and phone or cable services. This is a way to keep rates low and to protect the interests of those who do pay on time. Some employers do credit checks along with background checks during the screening of job applicants. This is necessary because it can be very costly if someone with financial issues is placed in a position and decides to compromise the company’s information or to possibly steal. Your credit score has an impact on much more than just the interest rate you are offered for a loan or credit card and it should because those with low credit scores tend to be relaxed in other aspects of business. There are individuals that may pose the argument that credit scores should not be a means for determining creditworthiness. Their take is that sometimes there are situations beyond one’s control that have an adverse effect on their financial situation. Some examples are the loss of a job, a demotion or reduction in income, the death of a spouse, or increased expenses or costs because of inflation. In these cases, their inability to pay their debt results in their credit score decreasing. When this occurs, one must make adjustments to their budget and take other measures to lessen the impact to their credit score. Credit counseling agencies are available to assist consumers with handling a sudden decrease in or loss of income, and making arrangements with their creditors. A consumer also can be proactive by contacting their creditors as soon as there is a major change in their financial situation. Creditors are more receptive to a consumer contacting them and explaining the situation because it provides the opportunity to work together at reaching a viable solution that is good for all of the parties interested. They have an interest because they want to avoid bearing the burden of bad debt whereas the consumer has an interest in taking the necessary steps to keep their good credit score intact. Raising a credit score takes time and one will find that there is no such thing as a quick fix. Being responsible and managing credit over time are the best ways to increase your credit score. Be sure always to pay bills in a timely manner and stay current by not missing any payments. Once there are delinquent or negative accounts on one’s credit report, they will remain there for seven years. Although potential creditors may not always take into consideration the older negative accounts, that information still appears on one’s credit report (Fair Isaac Corporation, 2001-2010.) It is not wise to open several new accounts all at once. Opening new accounts affect average account age, which could be detrimental to one that doesn’t have a large amount of other credit information. Do not apply for credit just for the sake of having it, only apply for situations as needed. Having credit cards and managing them responsibly are a good use of credit. An individual without any credit would be considered higher risk than an individual with responsible credit card management. If you know you will need to apply for credit in the near future, make every effort to reduce current debt as much as possible. Credit should be used wisely to ensure that a good credit score is maintained. References Consumer Reports. (2005). CR Investigates. Retrieved from http://www.consumerreports.org Fair Isaac Corporation. (2001-2010). myFICO. Retrieved from http://www.myfico.com