Things to remember in managing your cards and loans
If you’ve ever been turned down for a loan, you’ve learned the hard way the role of credit reports in your life. But the role of credit cards in your financial life extends beyond whether or not you get a certain loan. This article explains why it is so important to keep tabs on your credit report and to keep your credit score as high as possible.
First of all, what is your credit report? Well, it’s a compilation of information provided to three credit reporting agencies (TransUnion, Experian, and Equifax) by your creditors. Credit reports contain information about where you live and work, whether or not you pay your bills in a timely manner, whether or not you have had any charge offs or bankruptcies, and whether or not you have been successfully sued and have a judgment pending against you. Information stays on your credit report from seven to ten years, but creditors are generally most interested in the most recent two years.
All of your financial information is taken into account to form a credit score, a number between 350 and 850. The higher your credit score, the more likely lenders will be to trust you with their money. Any score over 720 is considered very good.
So what is the role of credit reports in your financial life? The most obvious answer role credit reports play is giving information to potential creditors. When you request a loan or a credit card, the first thing the lender does is get a copy of your credit report. Based on your credit history and credit score, the lender might do one of three things.
First, the lender might approve you for a loan with a low interest rate. This is likely to occur if your credit score is above 720.
Second, the lender might approve you for a loan, but at a much higher interest rate. The lender charges a high interest rate as compensation for the risk she is taking that the loan won’t be repaid in full.
Third, if your credit score really raises red flags, the lender might decide the risk of loaning you money is too great and decline your request for a loan or a credit card altogether.
But lenders are not the only people who look at credit reports. Many landlords also run a credit check before deciding whether or not to lease to a rental applicant. The financial gives the landlord valuable information about how you have handled money in the past. If you have several bills that have been paid late or not at all, the landlord may decide you are likely to default on your rent as well and refuse to rent to you.
Someone else who can access your credit report is a potential employer. If your job requires you to handle money or valuable objects, your employer may want to be sure you are not having financial problems and thus have no motivation for stealing the items entrusted to your care.
The role of credit reports in your life can be an extensive one. Because credit reports in your financial life play such a large role, it is important to stay on top of your credit reports and make sure they contain only accurate information.