Your credit score represents your creditworthiness, and the likelihood that you will pay your debts. Lenders use credit scores to evaluate the potential risk of lending money to consumers. The most well-known and widely used credit scoring model is the FICO score, which is based on the information in your credit report.
An Error On Your Credit Report Can Cost You
- Even a single error on your credit report can be very costly. Mistakes are very common and affect most consumers. Depending on the nature of the mistake, your credit score may take a small hit or a very substantial one. The potential damage caused by a credit report mistake includes:
- Higher credit card interest rates, which can add up to thousands.
- Higher homeowner’s insurance and car insurance premiums, as insurance companies analyze your credit.
- Higher mortgage interest rates, which can easily add up to tens of thousands over the life of your loan.
- Higher private student loan interest rates,
- Higher auto loan interest rates.
- Lost job opportunities, as many employers will not hire anyone with bad credit.
- Denied government clearance.
Studies have analyzed the financial difference between bad credit and excellent credit. The results? Having bad credit — even if it is the result of mistakes on your report — will cost an extra $65 per month in insurance premiums, $95 a month on a home equity loan, $282 a month on a mortgage, $138 per month on an auto loan, and $9,200 in additional interest charges on an average credit card balance.
How the FICO Score Model Works
Credit scores are used to measure the risk of default by considering several factors of a consumer’s history. FICO has released the following components that go into its credit score:
- 35% payment history. Late payments on any bills or accounts will cause a FICO score to drop significantly. Meanwhile, a history of on-time payments will boost a FICO score.
- 30% credit utilization. This refers to the ratio of current revolving debt, like credit card balances, to the total available credit. A FICO score may be improved by paying own debt to lower the credit utilization ratio or receiving a credit limit increase. Closing existing accounts will generally hurt a FICO score by impacting this ratio.
- 15% length of credit history. As your credit history ages, it has a positive effect on your FICO score.
- 10% type of credit used. Having a history of successfully managing several types of credit increases a FICO score. Types of credit includes mortgage, installment, revolving, and consumer finance debt.
- 10% recent credit inquiries. Credit inquiries occur when you seek new credit and it has a small impact on your FICO score. If you are shopping for a car loan or mortgage, All credit inquiries are recorded and displayed on your credit report for two years. Only credit inquiries you initiate, or those initiated by an employer or a company for a pre-screened offer will not have an impact on your score.
A FICO score ranges from 300 to 850. 60% of consumers fall between 650 and 799, with a median score of 723.
Every consumer has three credit scores using the FICO model because all three credit bureaus (Experian, Equifax, and TransUnion) use their own database, and information varies between bureaus.
Each credit bureau markets their score generated with their information in a different way:
- Experian: FICO Advanced Risk Score
- TransUnion: Precision
- Equifax: Pinnacle
It is crucial that you check your credit report at least once a year to correct errors and to detect unauthorized activity. Once again, the information in your credit report affects whether or not you get a loan, and it determines your interest rate when you do get a loan. The information also affects insurance, renting a home, and even getting a job. Therefore, you want to make sure the information in your credit report is accurate, complete, and up-to-date before you apply for a loan or a credit card, before you apply for a job, before you apply for insurance, and before you submit a rental application. Finally, monitoring your credit report will help guard against identity theft.
Contact Agruss Law Firm, LLC, for help receiving a copy of your free credit report. More importantly, contact Agruss Law Firm, LLC, for help disputing inaccurate information in your credit report.