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Even if you have not fallen on hard times, you need to know about your credit rating and how to make sure it accurately reflects your credit history. Negative information in your credit report can adversely affect your ability to get credit or get the best loan interest rates. Information about your credit history is collected by credit bureaus, who then sell this information to lenders and others who need it in connection with loans, getting a job, or other financial applications you may make. You must authorize the credit bureaus to give out this information by signing a waiver on an application you make. There are three primary credit bureaus in the United States who collect and disseminate this information: Equifax, Experian, and TransUnion. You should obtain a copy of your credit report from each of these bureaus at least once a year to verify that the information they have is correct.
You build your credit report every time you apply for and use credit. Creditors send information about your credit history with them to one or more of the credit bureaus. Most of the information is accurate and timely, but sometimes it is not. When you miss loan payments, pay late, default on a loan, or have a debt dropped (called a charge-off), that information goes on your credit report.
What Is Your FICO Score and Why Is It Important?
Just because you want to buy a home doesn’t mean that a lender is eager to loan you money. Lenders look at your past history in handling your finances, which is where the FICO score comes in. By the end of this article, you will be able to identify a good FICO score and how it was determined.
The FICO score boils your credit history down to a three-digit number that instantly tells a lender whether you are creditworthy. This score dictates what terms—if any—you will be offered in a mortgage. Pioneered by the Fair, Isaac Corporation, this score and similar ones used by other credit reporting services rely on the following factors:
How Lenders Rate Creditworthiness
A creditor usually looks at three factors known as the “three Cs”: capacity, capital, and character.
- Capacity. The present and future ability to meet your financial obligations. Some of the areas examined would be your work history and the amount of debt that you already owe.
- Capital. Savings and other assets that could be used as collateral for loans. Even if you are not required to post collateral, many creditors express a preference that you have assets other than income that could be used to repay a loan.
- Character. This boils down to trustworthiness, promptness in paying your existing bills and other debts, and your credit history.
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