April 28, 2009
Credit Score – Why It's Vital And How It Works
In this new age of tight credit and vulnerable banks, it's nigh on impossible for someone who cannot prove their income to get hold of credit. And this is a problem, as millions of people work for themselves, work freelance, work on commission or get bonuses. So in 2009, credit scores are vital for all these people.
Because lenders will not accept someone's word when it comes to income, they need to look at something, so they look at the borrower's credit score – if that ticks all the boxes, a mortgage is accepted. But what is a credit score and why is it so important?
A credit score is a history of credit, simply. It details every loan, finance agreement and credit contract that any borrower has ever taken out. But it also documents how that credit was handled – whether payments were missed, whether the debt was paid early and how much was exactly taken out when.
This can range from credit cards, store cards, mortgages, mobile phone contracts, gym memberships, utility bills and bank accounts. If a payment is met every month it's marked green, and then missed payments and arrears are marked red or black. The more missed payments, the worse the score. After a few years this builds up a detailed, private picture of a person, and for experts it's a full portrait of a borrower.
So lenders now put a lot of stock in these credit scores. If you have missed credit card payments in the past, a lender will question whether you can handle a mortgage. If you have had trouble meeting bills, a lender will question whether you are organised enough to be able to meet mortgage payments each month. But at the same time, a lender will be impressed with successful large credit card balances and well-maintained mortgages.
So go online and see what a lender sees. There are numerous sources where you can see your own score for a small fee. It is editable, so if there are irregularities or mistakes they can be amended. There are also ways and means to 'tidy up' or improve your score so as to make you a better borrower.
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