History of Credit
THE HISTORY OF CREDIT SCORING
The credit score system used today has evolved since the 1960s. It was originally designed to provide lenders with financial profiles on consumers who wished to borrow money. The lenders’ biggest concern was whether or not an individual had the ability to repay a loan, and establish what percentage of risk might be involved.
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Congress passed the Fair Credit Reporting Act in 1971 to establish guidelines for fair practices in regard to the use of credit scoring. This law was designed to promote accuracy in reporting and protect the privacy of consumers. In light of the increased use of credit scoring and a growing fear of identity theft, recent legislation has been passed to further protect Americans and improve consumer awareness.
The Fair and Accurate Credit Transactions Act of 2003 (sometimes referred to as The FACT ACT (FACTA) was signed by President George W. Bush on December 4, 2003. This amended the Fair Credit Reporting Act, enabling each American to obtain one free credit report every 12 months from each of the three main credit reporting agencies (CRAs); Equifax, Experian and TransUnion. Those bureaus have created a central web site, www.annualcreditreport.com, to accommodate Americans who wish to obtain copies of their credit report.
WHY IS YOUR CREDIT SCORE SO IMPORTANT
The credit scoring model seeks to quantify the likelihood of a consumer to pay off debt without being more than 90 days late at any time in the future. Credit scores can range between a low score of 350 and a high score of 850. The higher the score, the better it is for the consumer, because a high credit score translates into a low interest rate. This can save literally thousands of dollars in financing fees over the life of the loan.
Only one out of 1,300 people in the United States have a credit score above 800. These are people with a stellar credit rating that get the best interest rates. On the other hand, one out of every eight prospective home buyers is faced with the possibility that they may not qualify for the home loan they want because they have a score falling between 500 and 600.
DEALING WITH CREDIT CHALLENGES
Unfortunately, a person with a bad credit score is often in this position because he or she lacks the discipline to pay bills on time.
Of course, there are exceptions where unforeseen circumstances come into play, such as health complications, or loss of employment. There are a few things that may be able to bring your score up so that you can secure a better interest rate on your mortgage loan.
