Check Your Credit Report

Although they are occasionally used interchangeably, a credit report and a credit score are distinctive components of one’s credit history. Nonetheless, both credit reports and credit scores hold a lot of importance with respect to your financial future. The US Federal Law states that you can check your credit report from the three major credit reporting agencies for free once a year. However, there is no such provision to check your credit score.

 

A credit report is primarily compiled by collecting information from the lenders who have extended credit to you. The law entitles potential creditors to check your credit report to determine whether you are eligible for a loan. A credit report provides a snapshot of the credit use history and contains:

·        Personal information (name, address and social security number)

·        Types of credit (credit cards, loans, mortgages)

·        Duration of the credit line

·        Collection information

·        Amount of due credit

·        Credit inquiries

·        Banking information

·        Public records (bankruptcy, court orders)

 

Individuals generally check their credit reports only once they have been denied a loan. However, this is not advisable. One must check credit reports periodically. This helps to ensure that the information reported in it is accurate and there are no fraudulent accounts in your name. Ascertaining errors at an early stage helps to improve the credit report status more effectively.

 

Checking the credit report helps to establish the qualifying eligibility for a loan. It does not, however, help creditors establish the interest rate. For this, potential lenders will check your credit score.

 

Credit scores are computed by evaluating the information in the credit report and assigning a numerical value to it (usually between 300 and 900). This helps to ascertain the risk associated with extending debt. A higher score implies lower risk, thereby helping to acquire a better interest rate. Even insurers and employees treat a high credit score as a sign of responsibility and reliability.

 

FICO scoring methodology is the most commonly used system for checking the credit score. All three major reporting agencies use their own versions of the FICO score:

·        Equifax: Beacon system

·        Experian: Experian/Fair Isaac system

·        TransUnion: Empirica system.

 

Although the scoring methodology used by the bureaus is different, the interpretation is similar.

 

The computation of your credit score can be broken down into:

·        Payment history: 35%

·        Debt outstanding: 30%

·        Length of credit history: 15%

·        Newly acquired credit: 10%

·        Credit mix: 10%

 

You should check your credit score before applying for any form of credit, especially home mortgages having high value.