Financial talk

A credit score is a number that serves as a guide for lenders when making the decision of whether or not to extend credit out to an individual. This simple three digit number that ranges anywhere between the numbers of 300 and 850, the higher number being the better, helps the lender predict how likely a borrower will make payments on time. As for how the score is calculated, it depends on what type of information is reported in the credit report.

The type of information you will find in a credit report is as follows:

- Basic information such as your name, address, social security number, employer, and geographic code (to prevent discriminatory lending).

- A section that lists all of the open accounts, the date those accounts were opened, their credit limits, last reported balances, and payment histories.

- The public records section that lists any bankruptcies, tax liens, repossessions, or owed child support payments.

- The inquiries section that lists credit report inquiries that have been made by potential lenders. These are inquiries that are authorized by the consumer.

A credit score is able to be calculated based off of this information because it shows whether or not the consumer is using 30% or more of the available credit, if the consumer is using more than 20% of their income to make their credit payments each month, if payments are made on time, and if the consumer has applied for a lot of credit in a short period of time. Each one of the three credit reporting agencies, Equifax, Experian, and Trans Union maintain a credit report and score on each consumer as reported by the creditors.

Why it is important to raise credit scores

If consumers would raise their credit scores by an average of only 30 points, they could save $16 billion dollars. This is according to Providian Financial’s chief public policy officer, J. Christopher Lewis. The money is saved because securing a better credit score means receiving better interest rates on loans, credit cards, and other types of credit. The interest is what takes billions of dollars out of the pockets of consumers and it is all because of the concept of “the lower the credit score, the higher the interest.”

Getting a free credit report

As mandated by the federal government, the three major credit reporting agencies must provide a consumer a free copy of their credit report if they request it. The credit reports can be ordered at the same time or they can be ordered at different times, ideally three months apart. It is also important that consumers be aware of the websites that state they offer “free” credit reports from the credit bureaus. There is still a charge for monitoring services and other products as a result of taking these offers. It is important that credit reports be ordered by doing the following: Calling 877-322-8228, requesting by mail at Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA. 30348-5281, or through the federally authorized website www.annualcreditreport.com. It is important for consumers to obtain copies of their credit reports in order to develop and maintain good credit scores.

Salim Omar, author of “Straight Talk About Small Business Success In New Jersey” specializes in providing accounting and tax services to small business owners and professional practices in NJ. Salim’s articles are featured in various national magazines including Accounting Today, The CPA Journal, Chiropractic Economics, Wealth Manager and The Two River Times. You may request a free copy of Salim’s new special report titled “How To Drastically Reduce Your Taxes By As Much As 62% This Year Alone And Put Thousands Back In Your Pocket”