Why It Has Become So Essential To Know Your Credit Score?Francis Mwendo
December 05, 2006
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Your credit score like your reputation follows you around. This is
more true if you are embarking on a new venture like moving to another
town or starting a new business. What you have achieved in the past
remains significant. There would be very few occasions when it would
not matter. You may not realize the importance of
having a good credit history in the early years but be sure it will
become extremely valuable at a later date. A good credit history will
help you obtain loans at lower interests, get a better job, get help in
renting an apartment, secure finance for white goods and even get great
financial references when starting a new business. You have to
therefore keep track of your credit scores and to do this you must
obtain a copy, either free or paid of your credit report and score.
From the report you can read the contents and understand how it is
affecting you. Your credit score tells the lender what the
chances of getting his money back from you would be. To understand this
let’s relate it to the rank your child would show on his report card.
One glance and you would know the total number of students in the class
and the number at which your child is placed. The determining factor
here would be his performance in studies. Similarly, the lender
will have a good idea of how you manage your debt, your past record in
the same and any defaults or issues you have had. So just how
is this score calculated? All related information like your income,
credit history, employment details and the like are logged into a
computer and a score is obtained. If you get a higher score, the lender
knows that you are a good person to loan the money to i.e. you have a
better credit risk. If the scores are lower then that spells trouble. You
score can be lowered due to late payments, deferments, tax liens,
delinquent accounts and similar issues. If you have settled the same,
these issues continue to be mentioned on your report for up to seven
years. Some people may think if they cancel their credit cards
their score will be bettered. This is not true. Your credit score
actually shows how well you have managed your credit. The key is to
keep one or two credit cards and manage that debt rather than having
multiple cards and ending in a mess. While credit scoring only
puts you into a bracket, it is ultimately up to the lender to decide on
the actual course of action. Based on your low score your request can
be rejected. If you do get through, you may be offered the loan at a
higher rate of interest.
As in any kind of lending, the lender
takes a chance with his money, in that he may not get it back. As the
borrower you get a provision that you otherwise could not afford. The
rate of interest secures the risk for the lender and pays for the
facility for the borrower.
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