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Lenders, credit card companies, potential employers, and landlords are just a few of the people who may look at your credit score. If the numbers are good, it’s a sign you can be trusted. Low numbers suggest you have trouble managing money or are going through a hard time and can’t handle more debt. Since this one factor can have such a big impact on your life, you should take every possible step to keep yourself in good standing.
Your credit report represents the level of risk you pose to lenders should they choose to give you money. Other institutions and individuals doing business with you may use your credit report to determine your level of monetary responsibility. It shows how likely you are to pay bills on time, make regular loan payments, and abide by the terms of any type of financial agreement.
Maintaining a good or excellent score grants you access to more opportunities and perks than you would have with a score on the low end of the scale. A favorable credit rating means you have a better chance of obtaining credit cards with high limits, qualifying for personal or business loans, and obtaining debt consolidation help if you need it. You may also get lower interest rates on credit cards and loans.
In the event that you miss a payment or encounter an unexpected financial emergency, having a high credit score on your credit report may mean that the indiscretion carries less weight and that your rating bounces back more quickly.
Formerly the Fair Isaac Corporation, FICO provides the most commonly used scoring system for reporting credit ratings. The FICO scale ranges from 300 to 850 with low numbers representing poor credit scores and high numbers indicating stronger financial standing. The range is broken down into smaller subsets indicating where you fall on the scale:
As of 2015, the average credit score in the U.S. was 695, but 54.7 percent of people with established credit histories had scores above 700. Knowing where you stand is important because improving your score by just a few points can bring big benefits, including much lower interest rates on loans.
In the U.S., three main bureaus collect the information used to calculate credit scores into a single credit report. Equifax, Experian, and TransUnion use data reported by the institutions you do business with and combine it with other financial factors into one final number. Although there may be slight differences between these figures,all three bureaus weigh criteria in similar ways:
Each institution looks at how prompt you are with bill and loan payments and whether you carry a large burden of debt from multiple sources. If you request money frequently or open a lot of new credit cards, the three credit bureaus consider it a poor reflection of your ability to keep your budget in check. A high ratio of debt compared to the amount of credit available to you paints a similar picture. Maintaining low levels of debt and borrowing only from authoritative lenders shows more responsibility.
You’re allowed to obtain a report of your credit score once a year through AnnualCreditReport.com, a site authorized by the U.S. government to provide scores from the three main bureaus. Requesting this information doesn’t affect your credit score, so there’s no reason not to take advantage of the opportunity. By checking your score, you ensure that:
Other institutions aren’t lowering your score by performing repeated “hard” credit checks About one-quarter of all people find errors in their credit reports, often due to inaccurate data reporting. These errors could cost you a great deal in interest payments or missed financial opportunities, making an annual credit check an essential part of your money management plan.
Waiting for your next free annual credit report could mean missing important information and scrambling to fix problems you could have addressed much earlier. Investing in continuous credit monitoring enables you to keep an eye on your credit score at all times and catch potential issues before they become serious.
Read our reviews of the top credit monitoring services to discover which one provides the services you need to stay on top of your credit score. Look for a company with the ability to watch for errors, signs of identity theft, and other damaging information. When you have a complete picture of your financial state, you can enjoy the peace of mind that an accurate credit report provides.