The Credit Score and Credit Reporting Bureaus

Credit score is a figure that represents the credit worthiness of an individual. When you apply for credit, the lender will use this figure to determine the likelihood of you repaying them. The higher your credit score the easier it will be for you to get credit.

FICO Score 

FICO score is the most common type of credit score. FICO stands for Fair Isaac Corporation. FICO score was invented by this company. A person’s FICO score is reached by taking into consideration various factors including the payment history, debts, types and duration of the different credits availed by the person and new credit. Generally FICO scores range between 300 and 850. If you FICO score is more than 650, it means that you have a very good credit and it will be very easy for you to get credit. However if your FICO score is less than 620 points, you will have difficulty in getting credit easily.

 How the Credit Score Works 

When you apply for credit, the lender will check your credit score. Based your credit score, the lender will decide whether or not to offer credit to you. A high credit score generally means that you will be offered credit at a lower rate. When you obtain credit from a lender, the lender will supply the information to the credit bureaus. The lender will report to the credit bureaus whether you are regular on your payments and whether you have defaulted. Based on this the credit bureaus will assign you a credit score.

Importance of a good credit score 

A good credit score is important not only for getting credit but also for other purposes. When you apply for a new telephone connection, the telephone company may ask you for a deposit. If your credit score is high, then you may not have to pay a deposit or the deposit will be nominal. However if your credit score is low, you will have to pay a huge deposit. The same is applicable to insurance and credit cards.

Credit Bureaus 

Equifax, Experian and TransUnion are the three main credit bureaus. You are entitled to one free report from each of the three main credit bureaus. You can get more than one report but you will have to pay a nominal fee. The credit reporting agencies provide the lenders with a credit risk portrait. With all the information they gather about you, the credit reporting agencies try to help future lenders decide if they should lend to you or not. The credit reporting agencies have a very complex scoring system that takes many types of items into account. The payment history that you create lasts for 7years. This means that the credit reporting agencies show your late payments for seven years after the late payment occurred. For the next seven years, potential lenders will be reminded of your decision to make a late payment. If you filed for bankruptcy, it will show up on your credit report for the next ten years. The credit reporting agencies have a rating system. This rating system is called the R & L rating system.

Incorrect Entries on Credit Report

If you notice any incorrect entries on your credit report, you should inform the credit bureau and ask them to remove the information from your credit report as it can affect your credit score. For example, if some debt which you have already paid is appearing on the credit report, you should ask the creditor to validate the debt. If the creditor cannot validate the debt within 30 days of your request to validate the debt, the credit bureau must remove the debt from your credit report.

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