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The importance of a good credit score
Your Credit Rating Matters:
The Importance of a Good Credit Score

If you are considering applying for a loan, then you may first want to ensure that your credit rating and credit score are accurate. Why? Well, your credit report will be the first place that a financial company will look when you make an application to help evaluate whether or not you will be a low-risk customer and have good credit. There are three major credit reference agencies in the US:  Experian, Equifax, and Trans Union. Keep in mind that it might be worthwhile checking your credit score details with all three agencies to see where you stand.

You may not think that there will be an issue here if you have a good credit rating.  You may, for example, make sure to pay your bills on time every single month.  However, even if you think your credit score is squeaky-clean, it's worth checking it anyway. After all, it's in your best interests to ensure that all of the information in your good credit report is up-to-date and accurate.

The fact is that studies show that many credit reports contain inaccuracies that could affect your credit rating; this could even lead to the rejection of a loan application! Imagine finding out after the fact that you were rejected for a loan because of a simple human error or technical glitch on your credit score. That's why reviewing your credit report before you make an application can be a good idea.  It simply gives you the chance to have the agency change anything that may be the result of human error or technical problems.

So, before you make an application, check your credit report and credit rating for the following:

Clerical errors

Sometimes credit reports and credit scores contain inaccuracies that are the result of a computer glitch or a clerical error. These may include uncredited payments, late payments, or data mixed in from somebody with a similar name. By reviewing your credit report and credit rating before the lenders do, you'll see exactly what they will see when they look at your credit score, but you’ll be able to change inaccurate information on your credit rating before it's too late!

The solution:  Bear in mind that it's your responsibility to notify a credit reference agency of inaccurate information that affects your good credit, but the effort involved can be well worth it in the long run.

Excess unused credit

Do you have credit cards in your wallet or purse that you don’t use very often? Any that you never use? These cards can actually have an adverse effect on your credit rating, since lenders sometimes see too much 'revolving debt' as a negative when reviewing loan applications.

The solution: Consider reducing the number of credit and/or store cards that you hardly/never use, but that are listed as active on your credit report. If you don’t use a card and have no plans to do so in the future, then close down the account. Make sure that the account appears on your credit report as ‘settled’ as this shows that you closed the account down. If you don’t check this, then a prospective lender might assume that the card company closed the account for other reasons.

A few credit cards managed well may actually improve your chances of getting a loan by helping your credit rating. However, lenders don’t like cards with spending close to maximum limits, and interestingly enough, cards with lots of spare balance can be a bad thing too. You can always call a card company and ask it to lower your credit limit if you do have too much balance spare.

Late payments

If you have slipped up in the past and have made a couple of late payments, then this may not be anything to worry about. In terms of your credit rating, late payments are graded by their ‘lateness’ which is usually measured in months and by their frequency. As long as you haven’t made a whole load of extremely late payments and can explain what happened to a lender, then it may not hold this against you. However, too many ‘very late’ late payments are less likely to be overlooked. You may be termed a high risk, and if you get approval for a loan, its interest rates might be higher and its terms less favorable.

The solution: Be prepared to explain any late payments that affect your good credit. Also, since lenders usually look most closely at the last two years, if you've slipped up lately, make a big effort to make all relevant payments on time, every time.

Unnecessary credit searches

Did you know that each time a financial organization runs a credit search when you apply for a product, it will show up on your credit rating and credit score? Most credit searches stay on your credit report for up to two years. Note, however, that your own activity viewing your credit report will not be an issue here.

The solution: Avoid over-applying for credit products and having a lot of credit searches done on your account and your credit rating. Too much activity can make it look like you have financial difficulties, don’t have good credit, or are taking on more debt than you can repay. Of course, lenders understand that some activity may show up on your credit score from shopping around for the best rates on a loan, for example, so they often overlook some activity within a very recent period. It may also help to make a note of this when you make an application.

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