Every time you apply for a new bank account or credit card, a business loan, an automobile loan, or a mortgage, your lender looks at your credit history to evaluate the risk involved in loaning you money. Your credit report is in an indication of your willingness and your ability to repay the loan, and it is as important as your diploma in predicting your financial future. Your credit report determines whether your loan application will be accepted, the amount of credit you will be given, and the interest rate you will pay. It may also determine how much you pay for automobile and homeowners insurance.
Employers, landlords, and insurance companies also look at your credit report for evidence that you are responsible and reliable. An adverse credit report could cost you a job for which you are otherwise a perfect candidate. Three nationwide credit reporting agencies, Experian , TransUnion and Equifax , gather financial data and compile reports on individual consumers. Each agency uses different methodologies and is constantly trying to increase the accuracy of its reports, so the information on each report is a little different. Ironically, if you act responsibly, pay for everything in cash, and never borrow money, you may be turned down when you do apply for a loan because you have little or no credit history.
Credit reports include information on credit card accounts; retail store and gas station cards; bank loans; auto loans and leases; mortgages and home equity lines of credit; credit union loans; consumer finance accounts; and student loans. They tend not to include information on checking accounts or smaller credit accounts, or payment history for rent, utility bills, or medical bills, unless they have become delinquent and been sent to collection.
Credit reports also include information from public records, such as court judgments, tax liens, bankruptcy filings, and collection accounts. This type of adverse information can cause problems because it is not always updated when the problem has been resolved, the debt has been paid off, or the ruling has been challenged by the consumer on the grounds that it is inaccurate. Credit reports also record the companies that have requested your credit information over the past two years.
Increasingly, creditors, insurance companies, employers, and landlords look at your credit score instead of — or together with — your credit history. A credit score is a number derived from your credit history information and is considered an indicator of how credit-worthy you are. The original model for calculating a credit score was developed by the Fair Isaac Corporation, whose FICO credit score has become the industry standard says Loan Advisor Best Money Lender in Singapore. Each of the credit reporting agencies has developed its own unique formulas using the Fair Isaac model to assign credit scores.
The FICO score is derived by combining historical information about an individual with statistical data, and the various components of the score are weighted according to their importance. You can see the components that make up a FICO score, and the current interest rates charged for auto loans and mortgages according to FICO score. FICO scores range from 620 to 850, and a score over 760 is considered very good.
Savvy Student Tip: Credit scores are used to determine interest rates for private student loans. Though a young college student is not likely to have a well-established credit history, lenders use credit scores to help determine the interest rate for private student loans. Having a cosigner with a high credit score can significantly reduce the interest rate on a private loan. FICO recommends
checking your FICO score six months before you anticipate needing a student loan, to give yourself time to raise your score and correct any errors.
Student Loans and Credit Reports
In May 2008, Sallie Mae erroneously reported loans that were in graduated repayment as partial payments to the credit bureaus. Overnight, the Equifax credit scores of over a million borrowers dropped more than 100 points. The error was quickly corrected, but it demonstrated the powerful effect of student loan delinquencies on credit scores. A student loan in good standing does not have an adverse effect on your credit report or credit score. A student loan in deferment or forbearance is considered to be a loan in good standing. Delinquent student loan payments or loans in default have a negative effect on your credit score and may prevent you from getting a mortgage, car payment, or apartment rental.
A student loan default remains on your credit report for seven years. As soon as you rehabilitate a defaulted student loan, the default will be removed from your credit report, and your loan will be reported as a loan in good standing. Lenders regularly report on-time loan payments, as well as delinquent payments and defaults, to the credit bureaus. A history of steady, on-time student loan payments over several years helps establish a strong credit history and contributes to a higher credit score.