Credit Score and Credit Report
What is a Credit Score? In a nutshell, your credit score is a number that predicts how likely you are to pay back a loan or other credit obligations in a timely fashion. Scores generally range from 300 to 850 — the higher the score the better.
Your credit score is calculated from the data — your payment history, use of available credit, plus other factors — in your credit reports housed at the three main credit bureaus: Experian, Equifax, and TransUnion.
Credit scores are dynamic and can change up or down when your data at the credit bureaus changes. And they're calculated in real time so they're current as of the time you or a lender (or employer, landlord, insurance company, utility provider, or government agency) requests them. To get your free credit report, go to annualcreditreport.com.
Your score does not determine whether you're approved for credit or what interest rate is assigned — that's up to the lender — but it does help the lender make that credit granting decision. As important as they are, your credit score isn't typically the only information lenders use. They may also consider your income, employment history, the value of your collateral such as your home or car or any existing relationships the lender has with you.
So, why do credit scores matter to you? It makes the lending process faster and fairer. You’ll get faster answers from lenders since credit scores streamline the application process. And it’s fairer because it applies the same set of standards to all borrowers. In the end, credit scores provide you with more credit choices at competitive rates.
What Goes into a Credit Score
Credit scores focus on five key categories:
1. Your payment history (35%)
Have you missed any payments? If so, how often? How recently? And how late were they? Have you had debts turned over to a collection agency? Do you have foreclosures, or have you filed for bankruptcy? The more recent, frequent, and severe the reported negative items are, the bigger the impact on your scores.
ADVICE: Pay your bills on time. If necessary, set up automatic alerts as payment reminders. Missed payments, especially recently missed payments, can substantially impact your score, so it's important to get and stay current.
2. How much you owe (30%)
Next, there's the debt you're already carrying: Are your credit cards nearly maxed out? How many accounts with balances do you have? How much of your available credit is being used? If you're overextended, are you likely to miss future payments?
ADVICE: Keep credit card balances well below credit limits. Pay off debt, don't just move it around. Avoid short-term gimmicks such as closing unused accounts or opening new ones just to increase available credit. These tactics may have the opposite effect of what was intended. In other words, only apply for new credit accounts when needed.
3. How long you've had credit (15%)
Your credit history is composed of: the age of your oldest account, the age of your newest account, and an average age of all your accounts; how long specific credit accounts have been open; and how long it has been since the account has been used.
ADVICE: Think of the length of your credit history as part of your greater long-term credit strategy. Since it takes credit to get credit, consider getting started with a secured credit card.
4. If you've recently sought new credit (10%)
Credit scores also consider how often you've actively applied for credit in the past year. “Rate shopping” is accommodated for, and promotional, insurance and employment inquiries don't count against you.
ADVICE: When shopping for a home, auto or student loan, do it over a short period, so the inquiries get treated as a single search for credit. This tactic is often known as "rate shopping."
5. The types of credit you've used (10%)
Do you have different types of credit accounts – mortgages, loans, credit cards, etc.? Lenders like to see that you have been able to manage different types of credit accounts responsibly over time.
ADVICE: Don’t open credit accounts you don’t need, but do try to have a mix of revolving and installment credit accounts.
Last piece of advice: Request your credit report from each credit bureau at least one time each year — get it for free at www.annualcreditreport.com. Check it for accuracy, and if you find an error, contact the credit bureau whose report has the mistake and dispute the error.
How do I get a copy of my credit reports?
Source: Consumer Financial Protection Bureau
You have the right to request one free copy of your credit report each year from each of the three major consumer reporting companies (Equifax, Experian and TransUnion) by visiting AnnualCreditReport.com. You may also be able to view free reports more frequently online.
You can request and review your free report through one of the following ways:
Online: Visit AnnualCreditReport.com
Phone: Call (877) 322-8228
You can request all three reports at once or you can order one report at a time. By requesting the reports separately (for example, one every four months) you can monitor your credit report throughout the year. Once you’ve received your annual free credit report, you can still request additional reports. By law, a credit reporting company can charge no more than $14.50 for a credit report.
You may be able to view free credit reports more frequently online. When you visit AnnualCreditReport.com , you may see steps to view your updated credit reports at no cost, online. This gives you a greater ability to monitor changes in your credit. If needed, you can also ask whether your credit report is available in your preferred language.
You are also eligible for reports from specialty consumer reporting companies. We put together a list that includes several of these companies so you can see which ones might be important to you. You have to request the reports individually from each of these companies. Most of the companies in this list provide a report for free every 12 months. Other companies may charge you a fee for your report.
You can get additional free reports if any of the following apply to you:
You received a notice that you were denied credit, insurance, or employment or experienced another “adverse action” based on a credit report. In this case, you have a right to a free report from the credit reporting company identified in the notice. To get the free report you must request it within 60 days after you receive the notice. Other types of “adverse action” notices you might receive include notice of an unfavorable change in the terms or amount of your credit or insurance coverage, or unfavorable changes in the terms of your employment or of a license or other government benefit.
You believe your file is inaccurate due to fraud.
You have requested a credit report from a nationwide credit reporting company in connection with placing of an initial fraud alert on your credit file (you may request two free copies for an extended fraud alert).
You are unemployed and intend to apply for employment within 60 days from the date of your request.
You are a recipient of public welfare assistance.
Your state law provides for a free credit report.
Tip: Be cautious of websites that claim to offer free credit reports. Some of these websites will only give you a free report if you buy other products or services. Other websites give you a free report and then bill you for services you have to cancel. To get the free credit report authorized by law, go to AnnualCreditReport.com or call (877) 322-8228.
Source: FICO