Anyone applying for a credit card, car loan or mortgage knows that you are required to give a great deal of personal information including your name, address, and even your Social Security number. This information is not just for the lender, but is passed along to the credit reporting agencies so that they can let the lender know just what kind of credit risk you are.
There are three major credit reporting agencies and all must follow strict government regulations in what and how they report. This is important in keeping private information related to your identity and credit history from getting into the wrong hands. The three major reporting agencies or credit bureaus are Equifax, Experian, and Trans-Union. All work in a similar way to evaluate your credit risk.
The information gathered about you each time you apply for, use and pay back credit is objectively evaluated and translated into a numerical rating known as your credit score. This is actually a point evaluation system that takes into account how much open credit you have, how much you owe various creditors, and what kind of payment history you have, including if you have ever been late in making payments or ever defaulted on a loan. The lower the score, the higher risk you are to a potential lender.
FICO credit scoring system
The major credit bureaus use a system of scoring credit known as FICO. This is an acronym for the Fair Isaac and Company group that originally created the software and method of credit scoring. This method of scoring is not only used by creditors, but also insurance companies wanting to know more about your credit habits. There are even employers who are using credit scores and histories to determine what kind of employee you will be. When applying for a job, the interviewer may ask if they have your permission to check your credit. However, if you do not grant that permission, they cannot legally obtain your credit history.
There are many groups and organizations which for a small fee will send you your credit report and let you know your credit score. While this is good information to have before applying for additional credit, it is not necessary to pay for it. Federal laws dictate that every consumer has the right to know what their credit history says about them. This means you are entitled to get your complete credit report, free of charge, one time per year from the major credit reporting agencies. In addition, if you have been denied credit, the reporting agency must by law tell you why and upon request send you a copy of your credit report.
Review your Credit Report
In this age of identity theft, it is a good idea to request and carefully review your credit report each year. If there are any unusual items on the report such as credit cards you didn’t know you had applied for, that could be a flag that someone has used your identity to obtain credit. In addition, if they have applied for credit under your name, you are the one responsible for the debt, so chances are they are not repaying the debts. This will very quickly destroy your credit and opportunities to borrow money in the future.