This article was last updated on February 5
Here are 10 good to know facts around one’s credit score, what affects it and how to deal with bad credit.
1. Credit scores really impact the purchase of a home
Credit scores are driven by the record of paying bills and other debts reported to a credit bureau. Statistical studies have consistently shown that individuals with higher credit scores are less likely to be late with a payment and pose less risk of loss to a lender. A lower risk of loss translates into a lower cost of doing business, which in turn enables the lender to offer financing at a lower rate of interest. This means lower monthly payments and potentially significant interest savings over the life of the loan. For example, reducing the interest rate on a $100,000 30-year fixed rate loan from 7% to 6% would reduce the monthly payment of principal and interest from $998 to $889.
2. The most common barriers to getting credit
The most common barriers include a history of late bill payments, incorrect information on your credit report, too much debt, the types of debt owed and a lack of credit history. This is why it is vital for individuals intent on building a strong credit history to pay their bills on time, pay them in full, and to check their credit reports annually and correct any mistakes immediately. In addition, judgments or liens, defaults or foreclosures, collection accounts, charge offs, bankruptcies are also common barriers to getting new credit.
3. Late payments and your credit report
Each time you make a payment late, you run the risk of the creditor reporting the late payment to the credit bureau. Even if you catch up, your credit report will show that you are caught up – but it will also show that you were late.
4. Debt management plans to improve creditworthiness
Debt management plans are usually arranged by Consumer Credit Counseling agencies. While such plans may be appropriate for some individuals they will have an impact on the overall costs. Some future lenders may view a person who enters into a debt management plan as an individual who cannot manage credit.
5. If I have a good reason for not paying a bill, will it be overlooked?
Contact the creditor if you experience a crisis, like losing your job or becoming seriously ill. You may receive a grace period or payment plan from the creditor, but never assume such an agreement is automatic.
6. When I pay bad debt, doesn’t it go away?
No, because credit reports provide a history of your credit, bad debts, charge-offs and late payments can stay on your credit report for seven years. You can, however, provide your own explanation of the situation for inclusion in the report received by future creditors.
7. Check your credit report every year
You should check your credit report on an annual basis to be sure that there are no errors and to be sure there have been no attempts to steal your identity. Getting a copy of your credit report may be free or may cost you only a small amount of money. The fee to see your report is much smaller by comparison than the damage caused by an error or an identity theft.
8. Is it true that if I check my credit score, my score will be lowered because it is another form of activity on my credit history?
No, if you order your own credit report, your credit history is not affected. In fact, you should check your credit report annually. Nationally, everyone can gain access to a free credit report at www.annualcreditreport.com. You are allowed a free credit report from each of the three reporting agencies (Experian, TransUnion and Equifax).
9. If I have an unsatisfactory credit report does it take seven years to correct it?
No, you can improve your credit score over a shorter period of time because recent entries to your credit report carry more weight. So you should keep working toward better credit.
10. Correcting mistakes on my credit report.
If you believe that any one of your credit reports contains mistakes and you wish to correct the mistake, contact the company that developed the report. The three credit reporting companies are Equifax, Experian and Trans Union. They are required to complete an investigation of your disputed items generally within 30 days and provide you written notice of the results of the investigation within five days of its completion. This notice should also include a copy of your credit report if it has changed based upon the dispute.
See more on Getting Your Credit Score and Credit Report