Understanding Your Credit
Maybe you’re a seasoned borrower—you’ve been borrowing money for years—for homes, cars, education; and you probably have a few credit cards. Or maybe you’ve never borrowed a dime in your life. Either way, understanding your credit report and how it is used is vital in today’s world of countless lenders generating countless credit offers by mail, the web, and even face-to-face. So, where do you start?
LET’S START WITH THE BASICS
WHAT IS A CREDIT REPORT?
Your credit report contains information that has been reported about you by your creditors. As part of the credit report, a credit score is generated. This numeric score will range anywhere from 300 to 850. The higher the number, the better your score and the least likely you are to default on a loan (meaning less risk for the lender). There are three major credit reporting agencies in the United States: Equifax, Experian & TransUnion. Most lenders use information provided by these agencies when determining if you qualify for a loan. Each agency provides a credit score based on information they have about your credit history, employment history, and even rental payment history, generated from each particular agency’s scoring model. The credit scores used most commonly by lenders are those generated by FICO (Fair Isaac Co). Although Fair Isaac is extremely hush hush with the minute details of exactly how the score is calculated, we are aware of several factors that play a role in this calculation.
How long have your accounts been established?
The Fair Isaac model looks favorably upon those who have had accounts established for longer periods of time. A Borrower who has had several open accounts for just a few months generally has a lower credit score than a Borrower who might have just one or two open accounts for several years.
Have you recently applied for credit?
Be careful not to apply for every credit card that is offered to you. Your credit report looks at how many inquiries are on your credit report. Too many inquiries can be harmful to your score.
Note: Fair Isaac does seem to recognize if you are (for example) shopping for a vehicle. If you have several inquiries from vehicle lenders within a 14 day time span, Fair Isaac recognizes this and does not “ding” your credit score for every inquiry.
Have you paid your loan payments on time?
Payment history is huge. Huge! It is very important that you pay your payments in a timely manner. Delinquencies of 30, 60 or 90 days past due have a significant negative impact on your credit score.
Is the amount of money owed to creditors close to your credit limit?
It’s normal to have a high balance to credit limit on a vehicle loan or any other type of installment loan which you recently obtained. However, it is frowned upon to see a Borrower with several accounts with a principal balance close to or over the credit limit balance. Having several accounts at or close to the high balance will have a negative impact on your credit score.
Do you have a good mix?
How many open credit accounts do you have and what type of credit accounts are they: mortgage, installment, student loans, revolving credit cards? It is recommended to have a variety of account types. The average American might have one mortgage loan, two vehicle installment loans and three credit cards. This would be considered an adequate variety of open accounts. However, let’s pretend “Average Joe” has only 10 open credit card accounts. This lack of variety and excessive amount of revolving accounts would more than likely have a negative effect on his credit score.
MANAGING YOUR CREDIT REPORT
Now that you know a little bit about what your credit report says, you’re probably wondering how you can use that information to manage your credit report and improve your scores. OBTAINING YOUR FREE CREDIT REPORT As a consumer, you can obtain a free copy of your credit report periodically. The Federal Credit Reporting Act (FCRA) requires that each of the three major credit reporting agencies (Equifax, Experian & TransUnion) provide consumers with a free copy of their credit report once every 12 months. Access to your credit report from all three credit reporting agencies is provided by www.AnnualCreditReport.com. This source makes accessing your reports quick and easy. We obtained our free reports in less than 5 minutes. Keep in mind that this report will not include your credit score. You can request to obtain your credit score as well, but there is a cost involved—usually $4.95 – $9.95 per reporting agency. Don’t fret—not knowing your score should be the least of your worries when reviewing your report! The most important take away is that you seize this opportunity to review the information that is being reported to the credit reporting agency on your behalf.
DISPUTING INACCURATE INFORMATION
The online report access tool mentioned above also allows you to directly initiate a dispute for any information you believe is incorrect. Or if you prefer, you can type a letter explaining your dispute, along with documents supporting your claim, and mail it to the credit reporting agency. If you do this, it is recommended that you send the letter via certified mail so that you may track delivery of the package. Once the credit reporting agency receives your dispute, they have 30 days to investigate the claim and to respond to you.
CORRECTING YOUR MISTAKES
Adverse information, such as 30, 60 or 90 day delinquencies, unpaid judgements, collections or foreclosures, are generally reported on your credit report for 7 years from the date that the adverse event occurred. Bankruptcy information remains on your credit report for 10 years from the date of the event. While you can’t have this information removed from your credit report, it is important to correct your mistakes—make payments on time and pay any judgements or collections. Also, be sure to keep proof that these items are paid at your fingertips, as lenders will often request this information during the application process. Our suggestion is to communicate with your lender ahead of time that you have an adverse credit history and steps you have taken to make it right. It’s never too early or late in life to build a strong credit history. Monitor your report annually to ensure your information is being reported accurately, borrow responsibly, and make payments in a timely manner. Like anything in life, perseverance pays off, and you are in charge of your credit destiny!