Facts that should help understand credit scores in the right perspective
by Arina Smith Loans & Credit 09 June 2018
There was a time when only lenders were able to access the credit scores of individuals to decide whether to extend credit to them. The importance of credit score remained confined to lenders only who wanted to assess the credit risk in lending. However, the picture has changed drastically as individuals have started relying much more on credit lines. Ever since living on credits and loans has become a way of life, individuals have started realizing how important it is to maintain a healthy credit score. Today, everyone knows that their financial well being depends on credit scores that tell the world about your capabilities of managing credits efficiently. How reliable you are as a borrower shows up in your credit score. You can now view your credit scores and monitor them closely. To know how you could improve your credit score, you must understand various aspects of your credit score.
Availing credit helps to build a credit score :
Keeping the credit card or credit lines unused does not help to improve credit scores. You must use your credit card because your financial activity creates a credit history that becomes a part of the credit report. A credit score is the summarized form of the credit report that captures the financial behavior of individuals. Not using credit cards means you do not have any credit history and neither do you have any credit score.
Several credit scores :
Many different credit rating bureaus compile the credit history of borrowers and generate the credit scores. You could come across several agencies that offer credit rating services although FICO credit scores grab all the attention. Different credit scoring models are in use, and although each model uses the FICO formula, the methods of data analysis could differ that result in a slight variation in credit scores. While banks may use the credit score of some agencies, the lender you approach could use something different.
Credit score captures your debt profile :
Credit scores focus only on debts that you carry and do not take into account data related to your income, marital status, etc. It also does not consider your financial liabilities either because the purpose of a credit score is to analyze specifically your credit history only. A credit score is a tool for lenders that help them to analyze the risk exposure in lending, and it reflects your ability in managing debts. The credit score helps to impress lenders so that they agree to offer loans at lower interest rates and on favorable terms.
Credit applications affect credit score :
Experts at Personal Finance Analyst will tell you that if you apply for too many credit lines and always make inquiries for new accounts is not at all a healthy sign to lenders who might become skeptical in lending money to you. How would they know about your applications? Well, the credit score would reflect your financial activity revolving around debts. Too many applications translate into red flags for lenders as they become suspicious about your credibility. If you apply for credit cards just because it offers a good discount during checkout, you are inviting trouble because your credit score would take a hit. Operate with a limited number of credit lines if you want to maintain a good credit score.
Checking credit scores do not affect it :
Some people have a misconception that checking credit score can alter the score. This is far from the truth because people can check your credit score as many times they like and there would be no change to it unless there is some debt-related transaction happening. Checking of credit score or soft inquiries is not a factor in the formula used for determining a credit score. Employers also might check the credit scores of aspiring candidates, and this does not affect the score.
On the contrary, you should check your credit score regularly to monitor how you are performing in managing debts. The earlier you detect any negative effect on the credit score, the quicker you can act to correct the situation. If you observe any unusual movement in credit scores check immediately if it is an error or has happened due to some fraud.
Credit score has links to your character and reliability :
Although credit scores are essentially financial indicators, it has links to your behavior in financial dealings that indirectly point to your character traits. Some employers base their hiring decisions on credit scores. Similarly, insurance companies use credit scores to determine insurance rates, and even granting of security clearance could depend on credit scores. With 300 to 850 being the range of credit rating, the closer you are to the peak better would be your financial credibility and vice versa. Higher scores translate into higher reliability that lenders welcome.
Having a good understanding of how others perceive and use credit scores would make it easy for you to work towards building an impressive personal financial profile.
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