We often get asked this question: What is a credit score and why is it important in America? Frankly, Credit is an integral part of our everyday life and of our financial health. Many people consider their credit score to be one of the most important factors in determining their financial well-being.
Simply put – A credit score is a three-digit number that is calculated from information on your credit reports and generally ranges between 300 and 850. It is a numerical rating that measures a person’s likelihood to repay a debt i.e., their creditworthiness. A higher credit score signals that a borrower is low-risk and is more likely to make on-time payments if approved for a loan. Generally, a score of around 760 is considered to be good. A score of 800 or above is considered to be excellent.
Did you know? A good credit score increases your eligibility to get better interest rates and loans.
So how do lenders use this info? Credit scores are used by banks, lenders, and other financial institutions to help them decide whether or not to lend you money or offer you credit. The higher your score, the better your chances are of getting approved for credit or being approved for a loan or other financial products.
Let us take an example. Let’s say you apply for a car loan. You provide all supporting documents to your bank or financing company. yet, you get denied. You definitely would wonder what went wrong. Right?
Well, it can be a mix of multiple attributes but the one that would stand out quickly would be your credit score. If you have a history of missed payments on your credit card or auto loan, your score could suffer. With a low score, you may have to apply with lenders who can possibly finance your car but at higher interest rates (known as APR -we will explain that in another blog). The higher the APR. the more you will have to pay in interest payments until you pay-off the full amount.
Missing payments can affect your credit score.
Let’s take a look at some of the important facts about credit scores. There are 3 Credit Bureaus in America that you should monitor for your credit reports and the information included in them. These are Experian, Equifax, and TransUnion. Each bureau tracks and displays information about your creditworthiness and merchants/creditors from all over America report your credit activity to them. Sounds confusing? Well, we know it may sound complex and difficult to understand but credit monitoring is the first step toward responsible credit management. You need access to your credit profile so you can not only manage your credit history but also understand how to improve it over time so you can get access to more financial products in the future.
One question we usually get is: Why do we have to monitor 3 Credit bureaus? Why not one only? The answer may surprise you. Yes, you should monitor all 3 bureaus because each credit agency operates separately from one another, and the information they receive and include in your credit report could be different. So, it is possible that you may have different scores based on credit reports coming from different bureaus.
Credit Scores and Reports sound confusing and complex but we can help you become more aware of your creditworthiness.
In this blog series, we will continue to educate you about Credit Management and its different components. These are our views and we welcome your feedback. To conclude, we view Credit Management as essential for Americans and we break down this process into 3 steps:
- Start-off with Credit Monitoring: This would help you understand your credit reports and how your score is calculated.
- Manage errors and incorrect info in your reports: It is estimated that more than 70% of all credit reports in American contain an error or outdated information. You need to fix this. But that is only possible if you regularly monitor step 1.
- Build Credit: Once you have fixed errors in your existing reports, you are ready to get access to more financial products due to possible improvements in your scores. This is what we call credit building.