What Is A Credit Score Going To Be Worth To You?
There are very few people in society today who need to ask what is a credit score, or how does it affect their ability to obtain credit in the future, because the credit rating scoring system has become so well known. Nearly everyone knows that every time they have a bill to pay or a repayment to make on borrowed money this is reported to certain agencies and this information can be used in the future to determine whether or not you should be given credit. The system has many positive features, as well as some weaknesses which the authorities are trying to eliminate.
Anybody asking what is a credit score and what is it used for first needs to understand how the banking system works. Bankers make money by taking in deposits and lending them at higher interest rates than they pay. To make this work, the repayments need to be made consistently and they need to be made on time. Any delay costs the bank money, and loans which are never repaid are a toxic hole in the bank's resources. Every borrower who fails to repay a debt simply increases the burden on those who are able to pay, so banks have to assess the risk involved with each loan.
The way this risk is calculated is by using a formula which takes into account past financial transactions and other risk factors. The algorithm used is not secret, and can even be found on free Internet pages. The highest percentages of the credit score itself are assessed on someone's history of paying bills on time, and on the way they pay back borrowed money. Building up a good credit rating starts with making sure that all due monies are paid back on time, and failing to do this can have serious negative consequences.
People wondering what is a credit score made up of can find the answer online with just a little research. This has led to some of the criticisms of the system, because it is entirely possible to game it and make your profile seem more attractive than it otherwise might. Credit scores are reported to any agency or organization which has a genuine need for the information, such as when you are applying for further potential credit or bank loans. You can see your own report at any time, but you need to pay money to one of the three major reporting agencies.
The exception to this is that allowed by the annual credit report legislation, which gives each individual the right to see their credit file from each agency once a year without a fee being charged. This is something which everyone needs to think about, purely to make sure there are no serious errors on the file. It could also alert you to the possibility that your identity may have been stolen and used by another individual. Your credit report will show you how well you have been managing your finances, which may be important if you have damage to repair.
If you are wondering what is a credit score most damaged by, the answer is undoubtedly bankruptcy. A permanent failure to pay back money which is owed will destroy your credit rating completely for ten years, making it virtually impossible for you to get credit in the future. This can also impact your life in other ways, such as making it harder for you to find work or a place to live. There are times when going bankrupt is the only sensible course of action, but it can usually be avoided if the right action is taken in time.
It is obviously the best policy to keep your credit file as unblemished as possible, but there are always going to be times which unexpected occurrences will cause people to fall behind with payments. This has been happening with increasing regularity in recent years, as the economic downturn has forced people out of work. Once your credit file is tarnished it can be difficult to bring it back, but it can always be improved if you have the resources to start with. It may be difficult to get new credit, but if you have an existing arrangement you can use it as wisely as possible.
Many people worry what is a credit score going to be when they are about to fall behind with payments for the first time. There is no doubt that every failure to pay will have a negative effect on your rating, but the system still allows you to raise your score by using other facilities well and paying back money on time. Be sure to avoid any false promises from other companies that they can repair your rating and even get you out of debt, because they simply can't. This should be obvious once you understand what is a credit score.