Easy Rules Of Your Credit Score And Reports.
You may not know or care, but you probably have a personal credit report and a credit score. Lenders examine your credit report and score before granting you a loan or credit line. This section highlights what you need to know about your credit score and reports, including how to obtain them and how to improve them.
Understanding what your credit data includes and means
A credit report contains information such as
⦁ Personal identifying information: Includes your name, address, Social Security number, and so on
⦁ Record of credit accounts: Details when each account was opened, the latest balance, your payment history, and so on
⦁ Bankruptcy filings: Indicates whether you’ve filed bankruptcy in recent years
⦁ Inquiries: Lists who has accessed your credit report because you applied for credit
Your credit score, which is not the same as your credit report, is a three-digit score based on the report. Lenders use your credit score as a predictor of your likelihood of defaulting on repaying your borrowings. As such, your credit score has a major impact on whether a lender is willing to extend you a particular loan and at what interest rate.
FICO, is the leading credit score in the industry. FICO scores range from a low of 300 to a high of 850. Most scores fall in the 600s and 700s. As with college entrance examinations, higher scores are better. (In recent years, the major credit bureaus — Equifax, Experian, and TransUnion — have developed their own credit scoring systems, but many lenders still use FICO the most.) The higher your credit score, the lower your predicted likelihood of defaulting on a loan. The “rate of credit delinquency” refers to the percentage of consumers who will become 90 days late or later in repaying a creditor within the next two years. As you can see in the chart, consumers with low credit scores have dramatically higher rates of falling behind on their loans. Thus, low credit scorers are considered much riskier borrowers, and fewer lenders are willing to offer them a given loan; those who do offer loans charge relatively high interest rates.
Lenders use credit scores to estimate how likely people are to default on a loan.
The median FICO score is around 720. You generally qualify for the best lending rates if your credit score is in the mid-700s or higher.
Obtaining your credit reports and score
Given the importance of your personal credit report, you may be pleased to know that federal law entitles you to receive a free copy of your credit report annually from each of the three credit bureaus (Equifax, Experian, and TransUnion).
If you visit www.annualcreditreport.com, you can view and print copies of your credit report information from each of the three credit agencies online (alternatively, call 877-322-8228 to have your reports mailed to you). After entering some personal data at the website, check the box indicating that you want to obtain all three credit reports, because each report may have slightly different information. You’ll then be directed to one of the three bureaus, and after you finish verifying that you are who you claim to be at that site, you can easily navigate back to www.annualcreditreport.com so you can continue to the next agency’s site.
When you receive your reports, the best first step is to examine them for possible mistakes (see the upcoming section “Getting credit report errors corrected” to find out how to fix problems in your reports). In the past, I found minor errors on two of my three reports. It took me several minutes to correct one of the errors (by submitting a request to that credit reporting agency’s website), and it took about half an hour to get the other mistake fixed (a small doctor’s bill was erroneously listed as unpaid and in collections).
You may be surprised to find that your credit reports do not include your credit score. The reason for this is quite simple: The 2003 law mandating that the three credit agencies provide a free credit report annually to each U.S. citizen who requests a copy did not mandate that they provide the credit score. Thus, if you want to obtain your credit score, it’s going to cost you.
You can request your credit score from FICO, but you’ll get charged $19.95 for every request (that can set you back about $60 to see your FICO score for all three credit bureaus). Save your money. In fact, you can get your current credit score without paying anything. You can start with the FICO score simulator at https://www.myfico.com/free-credit-score-range-estimator/, which provides you with an estimated range for your FICO score based upon your answers to a short list of questions about your history with and usage of credit.
If you do choose to pay for your current credit score, be crystal clear about what you’re buying. You may not realize that you’re agreeing to some sort of ongoing credit monitoring service for $100+ per year, an expenditure I don’t generally feel is worthwhile.
Improving your credit reports and score
Instead of simply throwing money into buying your credit scores or paying for some ongoing monitoring service to which you may not give much attention, take an interest in improving your credit standing and score. Working to boost your credit rating is especially worthwhile if you know that your credit report contains detrimental information.
Here are the most important actions that you can take to boost your attractiveness to lenders:
Get all three of your credit reports, and be sure each is accurate. Correct errors (as I explain in the next section) and be especially sure to get accounts removed from your credit report if they aren’t yours and show late payments or are in collection.
Ask to have any late or missed payments that are more than seven years old removed. Ditto for a bankruptcy that occurred more than ten years ago.
Pay all your bills on time. To ensure on-time payments, sign up for automatic bill payment, a service that most companies (like phone and utility providers) offer.
Be loyal if it doesn’t cost you. The older your open loan accounts are, the better your credit rating will be. Closing old accounts and opening a bunch of new ones generally lowers your credit score. But don’t be loyal if it costs you! For example, if you can refinance your mortgage and save some money, by all means do so. The same logic applies if you’re carrying credit-card debt at a high interest rate and want to transfer that balance to a lower-rate card. If your current credit-card provider refuses to match a lower rate you find elsewhere, move your balance and save yourself some money
Limit your debt and debt accounts. The more loans, especially consumer loans, that you hold and the higher the balances, the lower your credit score will be. That said, your credit score will generally be maximized if you aren’t using more than about 30 percent of your credit limits.
Work to pay down consumer revolving debt (such as credit-card debt).
Getting credit report errors corrected
If you obtain your credit report and find a blemish on it that you don’t recognize as being your mistake or fault, do not assume that the information is correct. Credit reporting bureaus and the creditors who report credit information to these bureaus often make errors.
You hope and expect that, if a credit bureau has negative and incorrect information in your credit report and you bring the mistake to their attention, they will graciously and expeditiously fix the error. If you believe that, you’re the world’s greatest optimist; perhaps you also think you won’t have to wait in line at the Department of Motor Vehicles or the post office!
You’re going to have to fill out a form on a website, make some phone calls, or write a letter or two to fix the problems on your credit report. Here’s how to correct most errors that aren’t your fault:
If the credit problem is someone else’s: A surprising number of personal credit report glitches are the result of someone else’s negative information getting on your credit report. If the bad information on your report is completely foreign-looking to you, contact the credit bureau (by phone or online) and explain that you need more information because you don’t recognize the creditor.
If the creditor made a mistake: Creditors make mistakes, too. You need to write or call the creditor to get it to correct the erroneous information that it sent to the credit bureau. Phoning the creditor first usually works best. (The credit bureau should be able to tell you how to reach the creditor if you don’t know how.) If necessary, follow up with a letter or e-mail to document and provide a record of your request. Whether you speak with a credit bureau or an actual lender, make note of your conversations. If representatives say that they can fix the problem, get their names, e-mail addresses, and phone extensions, and follow up with them if they don’t deliver as promised. If you’re ensnared in bureaucratic red tape, escalate the situation by speaking with a department manager. By law, bureaus are required to respond to a request to fix a credit error within 30 days — hold the bureau accountable!
Telling your side of the story
With a minor credit infraction, some lenders may simply ask for an explanation. Years ago, I had a credit report blemish that was the result of being away for several weeks and missing the payment due date for a couple of small bills. When my proposed mortgage lender saw my late payments, the lender asked for a simple written explanation.
You and a creditor may not see eye to eye on a problem, and the creditor may refuse to budge. If that’s the case, credit bureaus are required by law to allow you to add a 100-word explanation (200 words if you are a resident of Maine) to your credit file.
Sidestepping “credit repair” firms
Online and in various publications, you may see ads for credit repair companies that claim to fix your credit report problems. In the worst cases I’ve seen, these firms charge outrageous amounts of money and don’t come close to fulfilling their marketing hype.
If you have legitimate glitches on your credit report, credit repair firms can’t make the glitches disappear. Hope springs eternal, however — some people would like to believe that their credit problems can be magically fixed and expunged. If your credit report problems are fixable, you can fix them yourself; you don’t need to pay a credit repair company big bucks to do it..
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