Before start do you need free annual credit reports? Find the secrets of credit score and how you can get your free annual credit reports.
What is credit report?
No one has the right to borrow money. Imagine if a stranger walks up to you to borrow some money what will you be considering before deciding to lend a stranger some money?
You want to know how likely is he or she is going to repay your money Similarly to be eligible for obtaining credit lenders such as banks or financial companies want to know your creditworthiness.
Trying to work out the probability of you being able to repay the loan based on your past behavior. Your credit report is your financial footprint or more accurately how good you are at managing debt.
Therefore, your credit report determines whether you will be successful in getting a mortgage to buy a house, getting a credit card, car or any personal loans, or just obtaining a mobile phone contract,
Why you need credit report?
If you are planning to buy a house, applying for a credit card, or simply getting a mobile phone contract, your credit report matters.
The higher your credit score the more likely your application is going to be successful. Your credit score not only dictates whether you obtain a loan but may also affect the interest rate being offered.
However, to show you have good credit wordiness you need to have debt in the first place if you have no debt or loan for over two years your credit score could be classified as ‘indeterminate’ as you have nothing to show. At the end of the post, you can find how you can get your free annual credit reports.
Who keep credit reports?
Both in the United Kingdom and the United States, there are three main credit reference agencies who do this data collection on us.
Credit reference agencies are likely to hold a credit report of you if you are over 18 years old and have taken out credit before, such as a credit card, opening a bank account with an overdraft facility, any loans, mobile phone contracts, or utility accounts such as the gas, electric or water supply.
From your credit report lenders, they can assess whether you are on the electoral roll and confirming your address any court judgment against you like a county called judgments or bankruptcies how many time other lenders have searched your credit report and number of bank accounts you have, utility companies you use, credit cards, mortgage, and mobile phone contracts over the last 6 years.
What is not in my credit reports?
It’s also useful to know what is not in your credit report. The lenders do not actually get to see any soft searches, any parking fines or driving fines who you live with or married to, student loans, whether you have been checking your credit report, your income, or any criminal records.
Although lenders cannot see any decline applications for credit these can be potentially worked out when they can see hoard searches registered on your file but no account or loan was offered. Credit reference agencies do not hold blacklists and do not dictate whether a lender offers you credit.
The Credit Score. Every credit reference agencies come up with their own criteria to form a credit score and one of the more popular scoring systems is the FICO score.
The credit score is an additional service provided by each credit reference agencies to indicate your creditworthiness. In general, the credit score is categorized into bad or poor, fair or average good, and excellent or exceptional depending upon the credit reference agency.
However, each lender will assess your credit report using their own credit scoring system or lending criteria. This is because every lender has their unique ideal client profile they want to work with or lend to.For example, some lenders may prefer to lend to someone who has a good track record on mortgage payments or someone who manage multiple types of loans such as car loan personal, loan credit card and so on Therefore do not get too obsessed with the credit score provided by each credit reference agency.
It only provides you with an indication of what lenders may perceive as being creditworthy. The credit score is just a guide to your creditworthiness and will be interpreted differently by every lender.
For example, if you have a relatively poor credit score be prepared to have more limited access to credit and possibly accepting higher interest rate on borrowings, and if you are lucky enough at the higher end of the credit score with any of the scoring systems you have more options with credit and more favorable to more lenders.
How to maintain a good credit score?
Although every credit reference agency or lender uses different criteria to assess your creditworthiness, I will share with you the generally accepted system used to form your credit score.
This will provide you with some idea on how you can improve and maintain a good credit score.
- Payment History: About a third of your credit score is made up of your repayment history. As you can imagine your trade record of how reliable and timely you repay your loan in the past tells a lot about how good you are in managing credit.
On the other hand, it is also a problem for those who are without a loan history. If you have no track record for lenders to assess your creditworthiness you will not be an ideal client to lend money. To have a good score for payment history you have to have at least some debt, proven to be reliable with your repayments with no late payments
- Credit Utilization: About a third of your score is made up from credit utilization as mentioned previously to have a credit score you need to utilize credit but you need to know how to do it right. This is to prove that you can handle credit provided responsibly for revolving credit such as the credit card.
You should always aim to leave balances of less than 30% of the available credit provided to you. This will be your total credit balance over the total credit limit available to you across all your credit cards. Also going over your credit limit or using your credit card to make cash withdrawals should be avoided.
One of the ways you can improve your credit utilization is requesting to increase your credit limit. Having a high credit limit whether it is on one card or several cards will effectively reduce your credit utilization.
For example, if you have a balance of $3,000 on a credit limit of $5,000 your credit utilization is 60%.
However, if you had increased your credit limit to $10,000 your balance of $3,000 equates to only 30% of credit utilization.
- Account history: About 15% of your credit score is made up of your account history. The longer you have held an account the better it is.
This shows that you have stability, ideally, the average age of all your accounts should be more than 9 years. The lower your average account age the weaker your credit score this includes bank accounts and credit cards.
This is why in general older people tend to have better credit scores. However, do not be despaired, we all have to start somewhere. From now on try to avoid losing any of your no-fee credit card or bank accounts.
- Types of Credit: About 10% of your credit score is on the types of credit you have. In general, the more types of credit you have the better your credit score is.
There are three main types of credit revolving credit like credit cards, installment credit like a car or personal loan, and mortgage.
Having a history to prove that you have the ability to handle different types of loans is favorable to lenders.
However, you need to avoid Payday loans which are seen as desperation and financial instability. Therefore, you should have a mixture of credit lines demonstrating your experience and reliability in handling loans but avoiding payday loans.
- Credit inquiries: Another 10% of your credit score is made up of credit inquiries. Credit report inquiries are divided into soft or hard search.
Soft searches are a superficial check on your credit file by lenders but a hard search is made when you formally apply for credit Whenever a hard search is performed it reduces your credit score.
The harder searches you have particularly over a short period of time the more your credit score will be adversely affected. This is because multiple credit applications in a short period of time demonstrate to lenders that you are likely to be in desperation for credit and possibly struggling financially Ideally spread out the applications for new credit.
The good news is hard searches only impact your score for one year and are removed after two years. You do not need to worry about soft searches as this is not visible to lenders and will not affect your credit score.
Other factors that might affect your credit score are to Be consistent and accurate in providing your details such as the address, telephone number, job description, and income. you’re trying to avoid any inaccuracies that could trigger a potential fraudulent loan application.
One of the easy ways you can maintain a good credit score is by registering with the electoral roll. This provides two very important pieces of information to lenders confirming your address, verifying who you are and implies the stability that you have stayed at the same address for some time.
Having a joint account can improve or adversely affect your credit score. If you have a joint account with someone who has a good credit score it would help improve your score.
For example, being a credit authorization user, such as being provided with a subsidiary credit card by a family member who has a good credit score will help improve your credit score.
Similarly, if you share a joint account with someone who has a poor credit score will negatively impact your score. This can be a bank account or a joint mortgage loan.
These are the main factors that make up your final credit score. Essentially lenders like to work with someone consistent in repaying bills or repaying agreed loans, sensibly manage their credit usage, proven to be able to handle different forms of credit, and also does not appear to be in financial difficulties.
By now you should have a much better understanding of what a credit report and a credit score is.
Although credit reference agencies charge lenders and you to obtain a credit score, however, you can find how to get your free annual credit reports.
How to get free annual credit reports?
In the United Kingdom you can access your Experian credit report through Credit Club by moneysavingexpert.com You can access the Equifax credit report through clearscore.com and finally assessing a TransUnion credit report through Credit Karma.
You can also choose to pay these individual credit referencing agencies for access In the United States you can assess your Experian credit report through Credit Score Card by Discovery. You can access the Equifax and TransUnion credit report through Credit Karma.
Similarly, everyone in the United States are entitled to obtain one free annual credit report from each of the credit reference agencies.
Finally, although income and expenses are not specifically recorded on your credit report and not taking into account in working out your credit score, during your loan application your affordability will be assessed together with your credit report in determining whether your lender will approve your loan application. Hope this free annual credit report guide helps you.