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The Importance of Monitoring Your Credit Score

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1. Understanding the Significance of a Credit Report

In the case where you are applying for a loan, credit card, or refinancing of a house, the creditor will use your credit report to evaluate your likelihood of repaying the loan and to set the interest rate you will be charged if approved. If you are considered to be “high risk” or unlikely to repay the loan, you will simply be denied the money you requested. In this situation, “high risk” may be equated with having a low credit score. This will result in the applicant having to shop for a high interest rate, which can cost thousands of dollars over the life of the loan. The individual needing the loan may be fully capable of repaying it, but it will be too expensive due to the interest charges, making it unrealistic. This is another example of someone with low credit being equated to a bad risk, with bad risk usually being too expensive to bother with. High interest rates and denial of credit can also affect low income populations, creating a class of people who must pay more for the same purchase, or not being able to afford it at all.

Now that we’ve talked about what credit is and how credit scoring works, we can move on to understanding the significance of a credit report. Many people wonder about the importance of paying attention to credit, or the point of having good credit (or paying off bad credit, for that matter). The simple answer is that your credit score directly affects your quality of life. This is because your credit report reflects your history as a borrower and a consumer, and this history is closely examined by various organizations to evaluate not only your fiscal responsibility, but also your character. The most common entities that will request a copy of your credit report are potential creditors or lenders.

2. The Benefits of Regularly Checking Your Credit Score

A credit scoring system awards points for each factor that helps predict who is most likely to repay a debt. A total number of points, the credit score, helps predict how creditworthy you are, that is, how likely it is that you will repay a loan and make the payments on time. Lenders consider the credit score as well as the total number of late payments or collections, the time since recent past due items, and the time since the occurrence of any derogatory information. If a consumer with a current credit score in the 600s could raise his or her credit score to the 700s, the savings over the life of a 5-year, $20,000 loan could be $83 per month on the difference in the amount paid for an auto loan at a 600 and a 700 score, which translates to a savings of $4,979.

Credit scores reflect credit payment patterns over time, with more emphasis on recent information. Credit scores were intended to enhance lenders’ ability to make fair, consistent lending decisions. It is important to understand that most of the best advertised rates in the lending market are only available to those with the best credit scores. This means the rate you are quoted right now might not be the rate you can receive on the same loan amount after your credit is evaluated. Taking steps to improve your credit status can secure you a lot of money over the life of a loan. Usually, the impact of a negative item can be improved by establishing a new pattern of good credit over time.

For any credit card misuse or fraud, your credit history can age rapidly. Scanning your credit history yearly can reveal if someone has been using your identity to obtain credit in your name. This could jeopardize the loan rates on a home or an auto purchase. If you do find that you are a victim of identity theft, monitoring your credit will be your first line of defense in fixing the problem.

3. How to Obtain a Free Credit Report

It is possible to obtain a free credit report if your credit application was declined. If you are unemployed and planning to seek a job in the next 60 days, if you are on welfare, or if your report is inaccurate because of fraud. Otherwise, it will cost $15 to obtain a report from each of these bureaus. The cost can be prohibitive if you just want to take a look at your report to see if it is accurate. In many states, the bureaus are required to provide one free report per year to consumers. Some of these states are CO, GA, MD, MA, NJ, CT, VT, and you can obtain 2 reports free if you live in the state of Vermont. Unfortunately, some of the credit bureaus are making it difficult to obtain the free report that you are entitled to. You may have to sign up for their credit monitoring service, and if you do not cancel this service before the end of the trial period, your credit card will be charged. To obtain a free credit report, you will need to provide your name, address, social security number, and date of birth. If you have moved in the last two years, you may have to provide your previous address. To maintain security, the bureaus may ask for information that only you would know, such as the amount of your monthly mortgage payment. You can obtain your report instantly by printing it out at the bureau’s website, you can order it over the phone, or the information will be mailed to you. It is quickest to request a report from Equifax, followed by Experian and TransUnion.

4. Interpreting and Analyzing Your Credit Report

If there is one crucial aspect to monitoring your credit score, it is understanding your credit report. There are four major sections to a credit report. It identifies you and it lists specific information about you. The credit accounts section lists information on specific accounts including the type of loan, when it was opened, your payment history, credit limit or loan amount and the current balance. The public records section can contain information on any debt problems or other financial problems you have had in the past. The last section lists the parties that have requested to see your credit report. After understanding the sections of a credit report, the next step in understanding your report is to identify any inaccuracies or errors as these can negatively affect your score. If you find any information in your credit report that is questionable or that you think is incorrect, you should consider disputing the information with the credit bureau and with the company that furnished the information to the bureau. If disputing the information provides you with no results, another option is to add a brief statement to your credit report. This can be seen by anyone requesting your report and may be taken into consideration when in review of any adverse credit decisions that you have made in the past. After identifying any errors, the next step is to check for anything that may be considered negative information. Any information that is at all negative can potentially lower your score. This is because this type of information is given a very high importance factor when your score is calculated. A last and very crucial step in understanding your credit report is checking to see if your credit has been accessed by unauthorized persons. Any credit checks that are made without your permission are considered an invasion of your privacy and or identity theft. Any such occurrence should be taken very seriously and reported to the credit bureau and the company in question.

5. Taking Action to Improve Your Credit Score

The first step is to find out what is causing the low credit score. There are numerous factors that may adversely affect a credit score. Factors that weigh the heaviest are late payments and charge-offs. While a good payment history on loans and credit cards will reflect positively on the credit score. The best way to tackle late payments and charge-offs is to avoid getting behind in the first place. This can be achieved by creating a budget and living within one’s means. Consider obtaining a second job or part-time job to increase the amount of income coming into the household. This can help get debts paid off, increase savings, and decrease reliance on credit.

Monitoring your credit score is an important aspect of the modern era as it is now used in a variety of situations. From job applications to credit cards, even to renting an apartment. An individual’s credit score has a substantial influence on determining one’s financial status. So what can be done to increase a credit score if it is determined to be too low for a given purpose? The following are some tips and strategies to help raise a low credit score.

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