Many people are not aware of the fact that every person has multiple credit scores. Their financial information is collected and stored by three major credit bureaus. However, the credit report is not the same in each bureau, there may be minor differences. They follow similar calculation models as well, but their credit score for the same person may differ slightly.
Depending upon the kind of credit that you are using and the credit that you are looking at, the score will be calculated. The lending companies also analyse the score depending on the kind of credit that you are looking for. For example,
For getting a new credit card,
For financing a vehicle,
Getting a mortgage
You may find that the monetary matters are complicated. You can, however, still understand the credit scores. Anyone who has a credit card, loan, insurance or taxable income has a credit record and credit report with the agencies. The entire financial history has many records and based on all these reports the credit score is calculated. Payment history makes up for 40%. The rest of the score is made up of credit utilization versus credit availability, length of credit history etc. One important factor is how many kinds of credits do you use, for example, mortgage, credit card or revolving credit.
Regularly check your reports. You are bound to get one report from each of these three agencies every year. Check CafeCredit for any discrepancy. Try to use a credit monitoring agency, which can alert you to any issues pertaining to your reports. All these credit scores and reports are analysed to decide whether you are eligible for a credit facility and the amount that can be availed by you and the rate of interest on that amount.
Insurance companies, credit card companies, or financial institutions look at your financial footprints to decide the way they are going to deal with you. When you apply to any company for a credit, ensure that both you and the company are looking at the same credit score from the same source, otherwise, there are bound to be discrepancies. By paying bills on time and maintaining low outstanding amount on credit cards, you can have a good credit score. Depending upon the credit reports and credit scores the financial companies divide the people into groups. The rate of interest on loans and insurance instalments are decided according to the group that you belong to. The credit score and report are also requested by employment agencies at times.
So it is very important to maintain a good credit score most of the time. Of course, anyone can go through some financial struggle in the life, but it is important to have a relatively debt free credit record. But even if the credit score is not great, then there are ways to improve that.
The most important aspect is awareness.
If you can keep track of your credit reports, then that helps a lot in maintaining a good record.
Paying bills on time is one of the most important factors. Delayed bill payment, even if by a few days, gets a negative tick on the report. So keep paying off your debts on time. Do not keep outstanding debts on your credit cards.
You can set up a payment reminder to help you be on time. You can also opt for automatic debit from your account, on a monthly basis. This will ensure that the instalment of your loan or credit card goes on time. But then again you have to be careful that the account has that much money to pay these bills.
Revolving credit over a period of time becomes a huge liability. Do not keep getting new cards, but manage with the ones you have. If you have too many cards, it becomes difficult to manage the payment for all and that too on time. Use the credit cards wisely. Once you close an account or pay back your loan, it does not mean that it is deleted from your history. In fact, all credit and debit payments together make that report. So do not try to erase anything from the credit score report. The best thing that you can do to improve your credit report, is to reduce your debt. It is easier said than done.
But once you look at your reports carefully then you can see which plan is charging you the highest rate of interest. So plan to repay that debt first. Then slowly keep a manageable payment cycle.
Now that you know the importance of credit reports and credit score, try to manage your finances in a way to live relatively debt free life.
A poor credit score will place you in a high-risk category so the rate of interest for any credit that you apply for, will be very high and cost you more time and money to pay back.