Credit Bureaus

Written by Gregg Ruais
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The three major credit bureaus in the United States are Equifax, Experian, and TransUnion, all of which keep records on every citizen who has ever borrowed money from a lending institution or owned a credit card. Banks, mortgage brokers, and even employers use people's credit scores to assess character and fiscal responsibility. A strong credit rating can boost your ability to purchase a house, obtain the best interest rates on loans, and even get hired for certain jobs.

Bad credit, on the other hand, will have an adverse effect on your financial freedom. People who have poor credit ratings will pay tens of thousands of dollars more on their mortgages than those who have perfect payment histories. Have you ever seen advertisements for zero percent financing on car loans? In every one of those ads, you'll probably find an asterisk. When you read the fine print, you might see that customers must pass credit checks in order to qualify for those deals.

Having poor credit can be an incredibly frustrating experience, especially if you are being penalized for an ill-advised decision you made when you were much younger, were forced to miss payments due to circumstances beyond your control, or just made a simple human mistake. At some point in life, everyone does something regrettable. The prevailing philosophy is to learn from those mistakes and move on, but when your credit takes a hit, those errors can come back to haunt you for many years.

Understanding How the Credit Bureaus Work

In order to build credit or improve a damaged score, you should understand how the credit bureaus work. Consider the fact that each of the three major bureaus keeps records of millions of people, most of whom have, at some point in their lives, missed payments. It is impossible to for these bureaus to listen to each and every person's story on why payments were missed.

There are just too many people for that. The bureaus operate like computers that compile statistical records. This sounds cold, but sympathetic pleas will get you nowhere with any of the three major credit bureaus.

Maybe you really did send that mortgage check out, and maybe the post office really did lose it. Without proof, however, you will be charged with a missed payment. Credit card companies and mortgage lenders automatically send information on payment delinquencies to the bureaus, and once that happens, it's an uphill struggle to correct a credit rating. If possible, state your case to the lender (credit card company, bank, etc.) before it informs the bureaus. If you can contact a customer service representative at a credit card company, for example, you'll at least get to state your case to a human being. Many credit card reps will waive late charges as a "courtesy" for good customers.

Credit Bureau Formulas

Few people know the exact formulas the major bureaus use to determine individual credit scores. What is public knowledge, however, are the various factors that make up these formulas. First, in order to have any credit score whatsoever, you must at least have a credit card. If you are just starting off, having a credit card and using it responsibly will pay off in the long run.

Loan payments have a tremendous impact on your credit. Sizable loans such as mortgages, student loans, and automobile loans must be paid on time. Credit bureaus heavily penalize late payments, but they also reward people who are diligent in paying off debts. When facing a tough financial situation, it's best to cut back on expenses such as entertainment, eating out, and other luxuries rather than missing loan payments.

Credit card balances affect credit scores in a similar fashion. A great way to establish credit is making a major purchase with a credit card and paying the full balance within a few days. High unpaid balances will adversely affect your credit score, even if you are making the minimum monthly payments on time. In short, any factor that would place you in a high-risk category according to a banker, such as high current debt or lack of experience paying creditors, will result a in lower credit rating.

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