Over 60 millions of Americans have no credit history at all, or the quality of the data collected about them is not enough to appropriately calculate a scoring average. Customers excluded from the market are doomed to use more expensive services, the so-called alternative lenders. Credit bureaus play an extremely significant role in the developed economies today – they collect data on the payment credibility of millions of consumers. On this basis, many of them offer a tool that makes it much easier for lenders to assess risk – credit bureau scoring. One three-digit number shows what the probability is that the customer will default in the future.
The credit score system is sometimes used to screen tenants of apartments, as well as candidates applying for a position in a new workplace. Lack of credit history or the so-called “thin file” can make it difficult not only to apply for funding but also to prevent you from improving your life situation.
The problem of having no credit history is a vicious cycle. To build credibility, you need to make a commitment and pay it on time. In turn, lenders reject customers who are not present in the databases. Those excluded from the “traditional” credit market turn to loan companies, pay a high price for financing and do not get out of the trap – lenders do not always report to data offices about their repaid obligations (the so-called positive information).
What Is a Credit Report?
A credit report, also known as credit history, is a collection of information about a person that is useful for assessing the risk of granting that person a loan, loan, or confidence in financial transactions.
Your credit report includes:
- basic personal data: name, last name, date of birth, social security number, address of residence;
- history of residential addresses and the length of stay at each address;
- information about bank accounts: bank name, account type, account opening date, overdraft limit (overdraft limit), debt amount;
- information on mobile phone subscriptions: name of the network or provider, date of signing the contract, amount of debt;
- information on taken out loans: name of the lender, date of the loan, loan amount, current amount to be repaid, information on loan repayment;
- credit card information: name of the issuing institution, date of signing the credit card agreement, credit card limit, current debt on the card, information on repayment of credit card debt;
- information about people or institutions with whom you are financially related, for instance spouse, financial partner;
- history of the use of the credit report by institutions or organizations to check the above-mentioned financial data.
History Of Credit – the Beginning
There is no doubt that online credit is one of the symbols of the modern digital world, where many things can be done quickly, easily and without leaving the comfort of your home. The very idea of borrowing money, however, is nothing new.
Credit was created in antiquity, even before money became known to the public. In the beginning, it was based on lending items of property that needed to be returned with little interest. Everything changed when the money, probably invented by the Sumerians, appeared. They were in the form of irregular lumps of precious metals. Elsewhere on the map of the ancient world, ducks acted as money, the weight of which indicated value or, as in Ethiopia, salt flakes. This model of trade was slowly giving way to a completely new invention – coins. They were probably invented by the Phoenicians and initially did not have a fixed shape – they were scraps of divided bars. Later, they took the round shape we know, on which the royal seal was stamped to minimize the risk of counterfeiting.
Another important breakthrough in the development of banking was the creation of non-cash settlements in the form of certified letters, which were used to carry out banking operations. As a result, people stopped keeping money at home and began to pay it to banks and banking houses, which greatly contributed to the development of the economy. Slowly, there was a shift to default money management. Cash was replaced by promissory notes, notes and documents.
Before the installment loans could see the light of day, the entire credit system had to go a long way. As early as in the 15th century, the money-lending practice became standardized. It started with individual benches or counters on which financial operations were performed. This is where the word bank comes from – from the Italian banko, meaning a bench. The first “bench” institutions evolved into well-developed banks. Bankers very quickly realized that there was no point in keeping entire reserves of money, and that a significant portion of the proceeds could be invested. One of the ways to increase bank profits was, of course, high-interest loans, which became popular at the turn of the 16th and 17th centuries.
Online banking was a great breakthrough in the history of loans. It happened in the United States in 1994 and it quickly hit the bull’s eye. Already in 2000 in the USA, accounts with Internet access were the order of the day, and in 2007 they were used by approximately 50% of Internet users. Other amenities appeared in an avalanche – mobile banking, transfers by phone, and finally the possibility of taking out a loan online.
Credit Score – What Is It?
Regardless of whether you want to buy a car or a house, rent an apartment or take out a personal loan, your credit score is checked. Your entire financial life comes down to a three-digit number that tells your debt and repayment history. This number may keep you away from being happy owner of a home, car or jet. This three-digit number is your financial freedom. The higher it is, the easier your life becomes.
A credit score consists of several factors:
- 35% of your score is determined by your payment history;
- 30% based on current debt;
- 15% based on your credit history;
- 10% is the so-called credit mix. Here, account diversity is checked. This 10 percent shows whether you can manage various debts such as credit cards, student loans, or a mortgage.
- 10% is allocated to the number of loan applications submitted and whether the loan has been granted or refused.
A credit score and a credit report are not the same things. While they are closely related, the credit report and credit score differ in various ways. There are three major credit bureaus in the United States: Experian, Equifax, and TransUnion. They prepare the report based on your financial competence. Credit reports contain detailed personal information such as your name, address, and social security number, as well as open and closed credit card accounts, loans, debt collection accounts, liens and bankruptcies. You are entitled to a free credit report from each of the three major offices each year through AnnualCreditReport.com, the only site federally authorized to provide free credit reports. Using the information contained in your credit reports, credit bureaus will calculate a credit rating, which is then shared with banks, lenders and other organizations. And yes, since there are many credit bureaus, you have more than one credit report and credit score.
Here’s what you should know about the FICO score
- You have the right to have your credit checked once a year for free. The credit score includes reports from three companies. You can find all of them for free at annualcreditreport.com;
- Your age, race, religion, gender and marital status do not affect your credit score;
- Thanks to the 2009 federal CARD Act, people under the age of 21 must have a certificate of employment to obtain a credit card. This law is designed to prevent credit cards from being “given away” to people who cannot pay them off;
- Your number is not affected by the type of work you do, who employs you, how long you work in the same company, and your home address;
- Earnings do not affect your FICO score. Earnings, however, affect the limit we get on the card;
- Your debit cards, even though they bear the VISA or MasterCard logo, do not affect your credit score. When paying by debit, you do not borrow, but use the money from your account;
- Benefits – Paying for gas, light, and phone bills on time is a good family financial policy but has no impact on the FICO. However, for non-payment of bills on time, you are sent to a collection agency – a debt collection company. An attempted debt collection by a debt collection company is reported to your credit report, and therefore, it lowers your score;
- Medical debts – by law they should not be taken into account in determining your FICO. Unfortunately, the truth is that companies using the old calculation system still take into account medical debts when determining credit scores;
- The issue of blank checks will not affect your score, unless you have paid for your credit card debts with that check. Not only will it lower your FICO, you will also be blacklisted by banks and credit card companies;
- Unpaid debt over $100 affects your rating;
- Opening a new credit card temporarily reduces your score;
- You want to buy a house or a car. You check the loans. You have 45 days to do so. During this period, multiple attempts by potential lenders to check your credit will not negatively affect your FICO;
- The number of credit cards you have does not negatively or positively affect FICO. What has an impact is the percentage ratio of the card limit to the debt;
- The nature of your debt affects your score. Better to have a house or a car to pay off and a couple of cards than just credit cards;
- High card debt has a negative effect on FICO. If it is over 30% of the limit then you have a problem. Ideally, it should be no higher than 10%;
- Failure to pay your credit card balance every month can lower your overall rating;
- FICO treats open and closed accounts the same, so don’t be afraid to close your credit cards.
The FICO rating ranges from 300 to 850 points.
- Exceptional: 800 and more
- Very Good: 740-799
- Good: 670–739
- Fair: 580-669
- Poor: 579 and lower.
Most credit ratings are between 600 and 750 points. If your credit score is in one of the lower ranges and you plan to apply for a loan in the near future, remember these few tips:
- Pay your bills on time – When it comes to creditworthiness, paying your bills on time is the best thing you can do.
- Keep your credit utilization below 30 percent – actively using your credit cards is a great way to stay creditworthy. Just make sure you aren’t using more than 30 percent of your available credit at any given time. And always pay off the sum every month if you can – you don’t have to carry the balance and charge interest to build a good loan.
- Take advantage of credit – even if you open a credit card and spend $20 each month, you will make progress in building a strong history.
- Diversify your credit. If it makes financial sense, check out other credit options such as car financing or consolidating your credit card debt with a personal loan. Paying off different types of loans will help increase your score.
When To Check Your Credit Score?
You have a right to check your credit score anytime you wish. It is important to bust the myth that frequent checking will lower your credit score, and hence contribute to overall bad credit and lack of validity in the eyes of lenders. Checking your credit score for your own insights is referred to as a soft inquiry, therefore it does not affect your credit report. Hard credit inquiries are noted by credit reporting agencies, and may slightly lower your credit score. Soft inquiries happen when you check your own credit score, when a third party runs a credit check on you upon your permission (landlord or employer), or in a case of preapproval for a loan.
Credit score is often checked by consumers looking to open a new credit card or preparing to apply for a loan in order to determine whether they qualify or will be denied. While house shopping, you might want to check your credit score for your own comfort before starting the preapproval process. Since many employers run credit check on potential employees, you might want to look into your credit rating before applying for a specific position. Building or rebuilding your credit is a time-consuming process that requires your own monitoring of your credit score to ensure you are taking the right steps to fulfill your financial goals and objectives. Checking your credit score from time to time will help you establish whether you became the victim of identity theft.
How To Check Your Credit Score?
By law, you are entitled to check your credit score annually for free with all three credit bureaus, TransUnion, Equifax, and Experian. In addition, there are a variety of monitoring tools available online that allow you to check your credit year-round, mostly connected to the identity theft services. These organizations are meant to spot any inaccuracies and inconsistencies regarding your credit report, which may be lowering your credit score significantly.
Credit Scoring Revolution
In June of 2018, the House of Representatives passed a law called The Credit Access and Inclusion Act. It assumes that some non-financial institutions (for instance, utility providers, landlords) may send information about their clients’ payment behavior to credit bureaus. This small change can make a huge difference – Experian research shows that including positive information on timely bills in the databases can reduce the group of people classified as subprime payers by half.
Negative data on delayed accounts in the collection process were already being sent to credit bureaus. The act is to compensate for the asymmetry and encourage to include also information increasing the credibility of payers.
Skeptics point out that the new law does not oblige every company that maintains stable financial relations with a client to report but only provides such an option. There is a possibility that only the largest suppliers will decide on such a step. However, the change should also reduce the number of people excluded from the financial market.
It is worth pointing out that our American credit bureaus have already experimented with the so-called alternative credit scoring, taking into account a larger range of data. However, these were products outside the basic range of reports, available at the request of banks and other institutions willing to use them. Now, the extended information will be available to all lenders and can be included in the algorithms for calculating the base scoring.