When applying for any kind of new credit, whether it is a student loan, credit card, home loan or another type of credit, you may notice some fine print on the form stating that your application implies consent for a credit check. That credit check involves the lender or credit card agency requesting a copy of your credit report from one of three major credit reporting agencies: Equifax, Experian, or TransUnion.
You may already know your ability to pay an anticipated bill with a new line of credit using consumer tools like financial calculators, but a potential new creditor wants to know more; your payment history and how you rate as a potential risk compared to others. This is where your credit score comes in. Your credit score is a three-digit number, which can range from 300 to over 800. The higher your score, the better your credit.
Factors that influene your credit score
About thirty percent or one-third of your score is based on your bill payment history. Another third reflects how much credit is available to you. The final third of the equation is a combination of the age of your credit history, how many different kinds of credit you have and how many new credit applications you have filled out recently.
Credit agencies use a variety of methods to determine your individual credit rating and also the "risk" that you pose as a potential borrower. Unfortunately, the "big three" don't use a standardized system to arrive at your credit score, so your results may vary between Equifax, TransUnion, and Experian. A credit score in the 700 range will get you good interest rates, while lower scores may make you less likely to get the absolute best rate.
Most people have credit scores between 600 and 800. The number of people at the lower end of the scale is reported to be in the single-digit percentage points, but in tough times that number can change. With high gas prices, increasing interest rates and other factors contributing to late or missed payments your credit score may fluctuate unless you can manage to pay consistently and on time.
What you can do to help your cause
The "on time factor" is one of the ways you can help improve your credit rating, but there are other ways to increase your credit score. One of the most important factors (after making your payments every month) is to insure your credit report reflects accurate information.
Contact the three major credit reporting agencies and see exactly what is on your report. You can challenge bad information and have it wiped from your record if you follow the procedures set by the reporting agency. This will take time and may require you to contact a creditor to dispute a claim. If you need to open a new line of credit but feel you don't have time to wait for a copy of your credit report, you can do a bit of homework to see whether you make a good credit risk before signing an application.
Calculate your debt-to-income ratio by adding up the amount you take home in pay versus the amount you pay out in bills every month. Does it add up to more than 40%? If so, you might be safer waiting to apply for new credit until you can lower the ratio. You can also estimate how much additional debt will be incurred if your credit is approved. If the amount pushes your debt-to-income ratio above 40%, try to pay down your bills until that ratio is lower. These are things the credit card company or lender will look at to determine if you are a good risk.
Know where your credit stands
If you aren't sure of your credit status, it is important to make these calculations before applying—every credit request you make goes on your record. Too many requests for credit can hurt your credit score and if a little homework reveals you might not be approved, it is better not to apply for the sake of your credit rating.
Tools such as financial calculators and measuring your debt-to-income ratio can help you avoid a rejected credit application, but they should always be used hand-in-hand with a copy of your credit report whenever possible.
In spite of what some believe, requesting a copy of your own credit report is not the same as making a request for credit, and does not hurt your score. You are entitled to know what your report says so you can contest bad information, prevent identity theft, and improve your score.
Knowing where to begin is half the battle. Be as thorough as possible when it comes to dealing with your own credit profile. Becoming aware of any possible glitches ahead of time will only make things easier when it comes time to apply for credit.