Living in the United States without using credit to some degree is virtually impossible. Credit scores are as important to adults as SAT scores are for high school seniors looking to get into a good university.
A credit score, originally called the Fair Isaac Corporation (FICO) score, was developed in the 1970’s through the use of data analytics. The number ranges from 300 to 850, where 300 is the worst possible credit rating, and 850 is a perfect score. The rating is a combination of several pieces of data that appear on a credit report. Lenders use this number to determine the creditworthiness of an individual by checking whether a person can repay a debt. Although the score was originally used by lenders, the credit rating system became evermore important as landlords and employers started using the score to determine the level of responsibility of a person. Property owners, for example, can use software that automates an online rental application to review FICO scores, among other information, and reach a decision regarding a tenant.
Many factors play a role in determining a FICO score, including student loans, credit cards, car loans, and mortgages. Also, being overextended in credit can negatively affect the number. Banks and financial institutions generally determine overextension by analyzing how much credit is available and how much credit has been used. Therefore, maxing out credit cards will lower the number substantially. Late payments will also influence the number. Although the late payment history will remain on the report for up to seven years, the impact will last for two years. The changes in the way that different companies use credit scores make the number important for everyone, not just those looking for a loan. Therefore, do you know what’s in your credit report? The answer to this question should always be a resounding “yes.” With the number of resources available to anyone looking to obtain a free credit score, you have no excuse to be unaware of the information. Periodically check the report and ensure that they are free of inaccuracies.
If people find errors on their credit report, they can report them to the main credit bureaus such as Experian, Equifax, and Transunion. Furthermore, the Federal Trade Commission (FTC) under the Fair Credit Reporting Act (FCRA) force companies that provide information to credit bureaus to correct any errors promptly, thus regulating the process for fixing mistakes. A report conducted by the FTC determined that about 20 percent of consumers had errors in their credit report. Among those, almost a quarter of the people who reported the errors improved their score once the reporting company corrected the error.
Technology is providing a way for consumers to regularly check credit scores and information that appears in their credit reports. Furthermore, as companies such as Experian fall victim to hacks, the government has increased pressure to force reporting agencies to share information and be transparent with consumers regarding reporting practices and how these companies store and secure data. The advantage to consumers is that fixing errors is easier and faster than in the past. So use the availability of information to ensure that your FICO number is accurate.