Your Credit Score

Did you ever wonder how a company can advertise that it will decide on your loan application within an hour? The answer is: your credit score.

Three credit reference agencies collect every scrap of credit related information that they can. If you apply for a credit product (credit card, loan, etc) then your record will be called for, and scored, and then the fact that you have just applied will be added to your record.

Your score will be calculated using a basic model called FICO, which was developed by Fair Isaac Co. in the 1980’s. Each bureau then adds in its own personal tweaking and gives you a FICO score (yes, that means you have more than one credit score).

Your FICO score will usually form the basis of whether you are offered credit, and at what interest rate. Of course each lender will adjust the score their own way, depending on their business model, so you may get a “yes” from one lender and a “no” from another.

Some tips for improving your credit score:

Pay your bills on time. Every credit company and a lot of utilities report every month on the people who have paid their bills on time, and those who are late. The occasional (and I mean occasional!) late payment won’t be a problem, but if it looks like a pattern, or that you have problems that will cause your score to fall.

Pay down the debts that you owe. This shows a creditor that you are serious about paying your credit back – and that you can afford to!

Don’t take on any more credit than you need and can afford. Lenders like to see that you are living within your means, and can pay off the debts that you owe.

Don’t apply for credit too frequently. Every time you apply for credit it shows up on your credit report. Too many applications will cause lenders to wonder why you want so much credit – is it because you are planning on getting as much money out of them as you can and then disappearing off to somewhere they can’t reach you?

Review your credit file. The Public Interest Research Group found that seventy percent of credit reports it checked had at least one error – and twenty nine percent of these errors were serious! Which is why it is recommended that you get your credit reports at least once a year and check them for errors.

The Credit Reference Agencies are:

Equifax – www.equifax.com
Experian – www.experian.com
Transunion – www.transunion.com

They all offer a range of “credit watch” services. You can get all three reports from any one of them, and monitoring services to guard against identity theft, and to watch your credit score.

Planning a major purchase?

For a car loan – Check your credit report, fix an errors and get pre-approved by a bank or credit union, you will usually get a better rate there then you will from a car dealership.

For a mortgage – Get your credit file at least three to six months before you are planning to apply for a mortgage. You will want to fix any errors, and strengthen your credit as much as possible so that you can qualify for the best mortgage possible.