Every financial institution or guru keeps on talking about good credit and credit scores. However, to a layman or a young adult, the hubbub surrounding ‘credit’ just seems unwarranted and unfounded. On the other hand, good credit is vital and must be cultivated and guarded jealously.
To track creditworthiness of an individual, financial institutions use a credit score. This is a three-digit number that financial institutions use to determine whether you can borrow money from them or not. A credit score is contained in a credit report.
Credit score
Investopedia defines credit score as a number that connotes the creditworthiness of an individual. A credit score is derived from one’s credit history. It’s from this number that a financial institution will gauge your ability to pay them back.
In short, there are a variety of credit-rating systems in the US and around the globe. However, the FICO (Fair Isaacs Corporation) system is the most commonly used system in the US.
This system factors in the following:
- type of debt a person has
- how long the debt has been there
- the interest rate on the debts the person has
- their payment history and new debts.
It is featured in the accounts section in a credit report.
Credit scores in the FICO systems are three-digit numbers. They range from 350-800. 350 is the lowest rating and connotes one as a very high risk customer. People with scores of 700 and above have very good credit.
Credit reports and how to read them
If you are intent on borrowing from a bank, you must first scrutinize your credit report. First-timers have a tough time making sense of the information contained in their reports.
However, once you know what the different things mean, it’s easy to chart a way forward and improve what needs improving.
Below are the main components of your credit report.
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a) Personal information
This section contains addresses and contact information. Also included are current employment and past employers as well. It is absolutely critical to verify this information and ensure that the correct details are captured by the credit agency.
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b) Credit summary
This section includes all the accounts you have and their balances. They include the ones that are currently active and the ones you’ve closed.
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c) Account history
This section contains all the information about credit accounts. It’s very detailed and you must evaluate it thoroughly to ensure its authenticity.
other valuable readings:
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d) Public records
This includes any public information like overdue child support, tax liens, and judgments. You must verify this information because any inconsistency is likely to stay that way for five to seven years.
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e) Credit inquiries
In this section, you will find all the institutions that have made inquiries about you and their dates.
By understanding your credit report, you can take control of your credit score. Share this article with your friends so that they know what the information on their reports means. With this knowledge, they can take control of their scores and finances.
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