The saying goes that ‘credit is king’, but what happens if your credit rating is less than desirable? What affects it and is it possible to repair the damage?
Nearly every American relies on some form of credit, whether it is a personal loan, overdraft, credit card, auto finance or mortgage.
However, every kind of credit leaves a trail, with each lender reporting to the agencies how the individual manages his or her account, including information such as late or missed payments as well as underpayments reported for any future lender to see.
It is these entries that help to make up a credit score and in the US, there are three main agencies that hold details; Experian, TransUnion and Equifax.
One of the most common ways to credit check an individual is using the information held by the agencies to use a reocgnized scoring system such as FICO – the most widely used credit scoring method.
The exact nature of the calculation is not publicized, but there are a number of different factors which can impact on a person’s score.
Late or missed payments make up around 35% of a credit score and conversely, debts that are repaid on time will improve a rating. Other factors that influence a credit score include the number of different types of credit taken out, as well as the length of time a repayment record has been sustained. Generally speaking, the longer, the better.
Lenders also like to see that there is some credit remaining on facilities such as overdrafts or credit cards; maxing out all available resources implies that an individual may be experiencing financial difficulty.
Of course, sometimes the information that makes its way to a credit agency is inaccurate or incorrect, so it is always a good idea to check your credit file periodically.
Under US law, every resident is entitled to one free report each year from each of the main agencies and this can be ordered either online or via telephone.
Credit scores are important because they not only provide the basis for lenders to decide whether to grant credit, but also how much they will charge. Individuals with a better credit score will be viewed as a better risk and charged a lower interest rate.
It is possible to repair a credit score once it has dropped, but in some cases, the changes will take some time.
Having credit and paying it off regularly is by far the best way to up the score; not having credit is not viewed favorably by lenders as it means they have no way of knowing how likely you are to repay your debts.
Lenders also like people who pay more than the minimum and have some spare space on their credit cards. But in order to achieve this, it may be necessary to find some spare cash in the budget and carrying out an honest assessment of all household expenses may identify some areas where money can be saved.
Using all available tools can also help to find areas where savings can be made and using a mortgage calculator with money supermarket or a mortgage broker may help find a better deal. Similar calculators are also available for auto finance and credit cards.
Anyone applying for credit with a less than perfect record should consider whether they can wait for some time before applying, as the longer ago any problems occurred – with an exemplary record since – the better the chance of being offered the more competitive rates.