The 411 on Credit Scores & Reports

Real Estate

The 411 on Credit Scores & Reports

Perhaps in an argument that our schools should teach more life skills to its students, many people are confused about what credit is exactly. Wikipedia describes credit as the follows "Credit is the trust which allows one party to provide money or resources to another party wherein the second party does not reimburse the first party immediately, but promises either to repay or return those resources at a later date."

One's credit score is then a numerical analysis of your credit ability. The higher your number, the more financial institutions trust your ability to pay them back. The lower your number, the less faith they have in you. Financial institutions are run by people, and people enjoy getting their money back, to say the least, so individuals with low credit scores are generally unable to get the loans a person with a high credit score would be able to secure, even if both of these people had the same level of income. Some companies make big money just investigating people's credit history; to say credit is a big deal could possibly be the understatement of the year. Many people think of loans purely in the classical sense, as in a personal or business loan, but there are other types of loans as well, such as mortgages and the ability to successfully apply and receive a credit card, so as you can see, credit can impact nearly every aspect of one's life.  

The lowest you can go on the credit scale is three hundred, while an individual caps out at eight hundred and fifty. Ideally, be above seven hundred and twenty, but as long as you aren't below six hundred and twenty, you aren't considered a risk. I'm sure you'd be shocked to hear that the financial institutions did what they could do keep how they determine credit a mystery for as long as they could (end sarcasm), but it wasn't until not too long ago that the cat got let out of the bag in terms of the mathematics they employ. 

Before I go into the breakdown of what goes into figuring out a credit score, let me explain the difference between a soft pull and a hard pull. A soft pull is something that, let's say a credit checking app on your phone like Credit Karma would use. It lets the credit institutions know that you aren't interested in buying anything, you're just checking the number of your credit. Many car dealerships will be able to implement soft pulls as well, so always be sure to ask which type will be run on you in any sort of financial situation where credit is involved. 

Now, a hard pull tells credit bureaus you are attempting to buy something. As long as you are trying to purchase within your means, and you haven't initiated any other hard pulls in the recent past, your credit number isn't effected. However, even if you get approved, if you begin buying up stuff with loans left and right, it can leave a bad taste in the financial institutions mouths. They prefer responsible purchases instead of constant ones I'm afraid, although I can hardly blame them. This can effect up to ten percent of your credit score.

There is an overall specific mix of credit that will either make you appear responsible, and ones that don't. What they are is anyone's guess, as the main three credit-reporting agencies (TransUnion, Equifax and Experian) all have different criteria. This only effects ten percent of your score as well, so just attempt to be responsible and someone is sure to notice. 

A minor fifteen percent is determinded by how long you've had credit, whether good or bad. When you turn of age, there is obviously no way to accumulate instant credit, so many parents do whatever they can, including taking a credit card out in the name of their child, to give their kid a leg up when he or she turns eight-teen. 

Obviously, owing money is going to make you look bad, so that takes up a good thirty percent of your credit score. The flip side of that is, if you owe a lot of money, but always make regular payments and have a history of always making regular payments, you'll see your credit score improve. Don't let debt get you, always make a deal on a minimum payment per month just for your credits sake. Your payment history is thirty-five percent of your total credit score, so you can see how these two categories have the most impact on your ability to purchase houses, cars, receive business loans, or even go to Ruth's Chris Steakhouse and putting it on a credit card. Yet another reason to get your children's credit moving as fast as you can, and to teach them the importance that credit will play in their lives. The major credit Gods, as it were, give reasons why they give you the number they do, so be sure to pay close attention to those at all times so you know what to do to improve your credit score. 

Keeping track of all of us people is apparently hard work, as many times the credit bureaus are wrong, or at least behind on the facts, with your credit report. Always check your credit report for accuracy; you could be a victim of identity theft, someone with the same name as you could have gotten mixed up with your file, or maybe they just haven't heard about you paying a debt. If you do owe someone money, you may not be aware of it if the collection agency or service hasn't located you, so a credit report is a good way to double check that as well. You can expunge, as it were, late payments you've squared up on more than seven years prior, so always keep an eye out for those as well. Also double check your address and social security number, just to make sure they don't have you mixed up with another person with the same name. It happens! 

Credit just takes time to build, so letting it degrade is never a good idea. Just pay your bills on time, reduce your debts on time, and start 'em young! That's my advice.