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by: Sahil | last updated: October 31, 2009
Tags: credit reports, importance of credit reports, credit, credit scores, credit ratings, credit bureaus, FICO

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Importance Of Credit Reports

There are many laws that have been passed in order to monitor and regulate credit reports. One of the Acts that decides who should have access to your report is the Fair Credit Reporting Act. This act has provisions that limit the number of people who can gain access to the report. Your credit report can be scrutinized by people you have done business with, such as lenders, landlords, credit card companies and other business entities. Each of these groups must have a “permissible reason” for viewing your report, and these inquiries are called hard inquiries.

Potential employers can also make use of this report to gauge your honesty and promptness as far as your financial obligations are concerned. However, the employer needs to get permission from you in order to view the report. These inquiries are called soft inquiries and do not have any effect on your report or your credit score. Companies can also get a hold of your address and telephone number from credit bureaus for promoting their product or offering some financial service. These are also branded as soft inquiries and have no impact on your report.

The credit report is used by lenders to determine whether you are a good financial risk or a bad one. Many people do not realize their indebtedness due to availability of temporary credit and slowly but surely get into personal debt. The report can act as a wake up call to those who are unaware of their exact financial standing in the credit market. If you have been denied a loan, mortgage, or an increase in your credit limit, then it is a sign that your credit report is not healthy enough. So credit reports can act as a thermometer for gauging the financial temperature and health of your finances.

The Fair, Isaac and Company came up with a formula to calculate a persons credit score in the 1980s and it is used by the three bureaus to give a kind of ranking to your creditworthiness. The credit score is usually between 300 and 850 and the higher your score is, better are the chances of getting loans and other credit related products. This score is calculated by taking into account various factors in your financial history. It does not lay emphasis on one particular factor but takes a holistic approach towards calculating the score. Just one missed payment or late payment on your credit card may not make a huge difference. However, regular occurrences of defaults in payments will definitely bring your score down.

In addition to using your credit score to help decide whether its a good idea to give you money, lenders use the score to determine your rate. In general, the better the score, the lower the rate - and the lower your payments. Some insurance companies use credit scores to help decide if you are a good risk. They dont necessarily use your entire score, though.

Bureaus may provide a modified insurance score that uses only part of your credit history. Some states have also passed laws banning the use of credit scores for insurance. It may seem like a good idea to remove the temptation of an unused credit line, but if that line is one of your older forms of credit, your score may go down. Also, your debt-to-credit ratio is important - having an unused line of credit makes your ratio go down, improving your score.

Credit reports are not only financial statements but they are also a touchstone with which lenders, banks, landlords, marketers, and insurance companies can judge your creditworthiness and honesty. A good credit rating or report may not necessarily mean that a person is rich; it simply means that the person is honest in his financial dealings.