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Ruin Your Credit? Know About Your Credit Report Score |
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Virtually every adult in the U.S. has a credit report score. The Fair Isaac Company created the credit report score also known as FICO. Adrienne is certainly an independent individual! I suspect that most of us admire that. But, if she's not careful, she could needlessly paint herself into
a financial corner. There was a time when having a good reputation in your town was enough to get you credit when you needed it. And, no stranger could destroy a good reputation simply by making a claim against you. But, somewhere along the way, companies began to collect information about borrowers. And they sold that information to potential lenders. Your credit report score will be a number between 300 and 850. A higher number indicates a better credit risk. So higher is better. Most people have scores between 600 and 700. Not surprisingly lenders want to get their money back. And the best indicator of a borrower's ability to repay a loan is their credit report score. Over 75% of mortgage lenders and 90% of credit card lenders consider your FICO score when determining whether to make a loan and how much interest you should be charged. When a creditor wants to know about your credit, he or she pulls a copy of your credit history. This is called an inquiry, and the inquiries section of the report contains a list of everyone who has accessed your credit history in the past two years. Finally, credit-reporting bureaus also collect public record information from state and county courts (including bankruptcies, foreclosures, lawsuits, liens and judgments) and overdue account information from collection agencies. Your credit report score takes all of this information and translates it into a number that ranges from around 500 to 900. Each of the different factors translates into a different part of your credit report score. Now let's look at Adrienne's situation. It appears that she has had some disagreements over bills and refused to pay them. That, plus the fact that she continues to get credit tells her that her credit report score is unimportant. Is that true? Adrienne's credit report score not only affects her ability to get credit, but also the amount that she pays for it. So, unless she pays her credit card bill in full each month, a low credit report score will affect what she pays. She might want to check the fine print on her original credit card agreement. In some, if your credit report score drops below 600, you'll be charged the penalty rate on the outstanding balance. Those rates can be as high as 30%! But the biggest potential hit from a low credit report score comes when you finance a home or auto. Some credit reporting agencies estimate that a 200-point drop in your credit report score could add 3.5% to the interest rate on a 30-year mortgage. It adds over the life of the loan that works out to over $80,000 in extra payments. And unfortunately even if Adrienne never runs a credit card balance and has her home and auto paid off, she's still not completely independent of a bad credit report score. Auto insurers and potential employers can access your score. A low score can affect whether you get auto insurance or that new job. Even utility companies and potential landlords are using credit scores. So should Adrienne just give up and pay bills that she doesn't feel she owes? Nope. But if the disputed bill is entered into her credit report, she needs to contact the credit reporting agencies and have her side of the story entered. Even if you don't have disputed bills, it's a good idea to check your credit report score annually or before you apply for a mortgage or auto loan. Recent studies have shown that 29% of credit files had errors significant enough to cause a 50-point swing in the credit report score. Philosophically, I agree with Adrienne. I dig in my heels when someone threatens me. But unless she's unusually self-sufficient, she probably needs to periodically check her credit report score and share her side of the story on any disputed bills! |
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