From college students to retirees, credit scores have become one of the most important numbers in the lives of Americans. Financing a college education, buying a car, or even renting an apartment can be affected by your credit score. Excellent credit can make borrowing money more affordable, while poor credit can be a cause of embarrassment and frustration. Understanding your credit score and its impact is the first step to financial freedom.
Even in the early years of banking, lenders realized there was the need for a more accurate assessment of consumer risk. As a result, those in the financial industry devised a method to assess consumer reliability - credit reporting and credit scoring.
A credit score is determined by evaluating specific factors, from payment histories to account activity to types of credit to length of credit history. Actions, such as timely or late payments, high credit card debts, judgments, and even bankruptcy will impact the credit score values and perceived levels of risk. Since most credit bureaus use Fair Isaac and Company (FICO) evaluation software, credit scores are sometimes called FICO numbers. Depending on the credit bureau and its scoring system, these three-digit scores can range from a low of 300 to 850, which is considered the highest by some bureaus.
Depending on an individual's perceived credit worthiness, obtaining goods, services, more credit, and even employment can be impacted. Some companies, such as banks and other financial institutions, will not hire people with poor credit. Some federal jobs consider credit scores and reports when assessing security clearances. Buying a house or renting a car can also be problematic for a person with questionable credit scores.
Since credit scores are based on five general criteria, credit scores can change based on a person's financial situation and improve over time. Entries, such as bankruptcy, are removed from credit reports after seven to ten years. Elimination of negative entries generally results in higher credit scores. Correction of adverse entries, included in error, helps improve credit scores as well.
Credit scores can make a difference when obtaining loans at low interest rates or buying that dream house or car. Maintaining good credit or improving poor credit is one key to any individual's overall financial plan.
