Category Archives: Credit Score

What Information is in a Credit Report?

Since your credit score is based on information in your credit report, it is important to know what your report contains. Your name, address, social security number, date of birth and employment will be listed on your report to identify you and are not used in determining your credit score. Your report also includes:

1)      Trade Lines – These are your credit accounts, which  include loans, mortgages, credit cards, and other credit accounts you’ve opened. Your report lists the type of account you have, when you opened it, its credit limit, the account balance, and the details of your payment history.

2)      Requests for your credit – These are also known as credit “inquiries.” There are two kinds: hard inquiries and soft inquiries. When you apply for credit, you are giving authorization to the lender to view your credit history. Your report will list everyone who viewed your credit report in the last two years. This is known as a “hard inquiry” or “voluntary inquiry” and can affect your credit score. On the other hand, “soft inquiries” or “involuntary inquiries” are ones that you didn’t initiate. This includes when you check your own credit reports and scores or companies that request your report to make you a preapproved credit offer. Soft inquiries don’t have an impact on your credit score.

3)      Public records and collections – These can include collection accounts, bankruptcies, tax liens, foreclosures, lawsuits, and judgments. These public records are taken from state and county courthouses, as well as collection agencies.

There are time limits on how long certain information should show on your credit report. Although positive information can stay indefinitely, negative information including late payments, foreclosures, and collection actions, must be removed after seven years. Bankruptcies can be reported for ten years. Inquiries should be removed in two years. To ensure a more accurate credit score, make sure you review your credit report and see if all the reported information is correct.

All this data is collected and stored by credit bureaus, which are private, for-profit companies. The three largest credit bureaus in the U.S. are Equifax, Experian, and TransUnion, and they sell information about you to lenders. Since not all lenders report information to all the bureaus, if you were to get copies of your credit reports from the three bureaus on the same day, you’ll probably notice a few differences among them. For example, the balances showing up on an account might differ from bureau to bureau. Therefore, because your score is based on information that is in your credit report, your score will also be different depending on the bureau you use. You can get a free copy of your credit report annually from each of the three largest bureaus at a single site: www.annualcreditreport.com

To check your FICO credit score, visit MyFico.com

How Do I Get My Credit Score?

Although U.S. residents are entitled to get free copies of their credit reports annually, this doesn’t include the right to free credit scores. The credit bureaus can and do charge for those.

Real FICO Score

Some credit bureaus sell credit scores to consumers that aren’t based on the FICO formula, but are claimed to still be good indicators of a consumer’s creditworthiness. However, these results can differ from the FICO numbers that lenders typically use. This can cause a problem for you because the scores you paid for may be different from the actual score a lender is using to evaluate your creditworthiness. Most credit bureaus do not go out of their way to tell people that the scores they’re selling aren’t the FICO scores most lenders use. Sometimes, these scores can vary as much as a hundred points from the FICO score. Hence, if you are paying for your credit score, be careful and make sure you are getting a real FICO score.

The FICO score has a different name at each of the credit reporting agencies, but they are all developed using the same methods by Fair Issac.

Credit Bureau                       FICO Score Name
Equifax                                     Beacon Score
Experian                                  Experian/Fair Isaac Risk Model
TransUnion                            FICO Risk Score, Classic

One of the places to get your credit score is www.MyFICO.com, a joint venture between Fair Isaac and Equifax. When you get your FICO score, you can also get a summary of the major factors that are affecting it. Understanding these factors can help you improve your score.  For example, a notation that your balances are too high is a hint for you to pay down your debt.

As a precaution when getting your credit score online, check to see that you have a secure connection before you reveal any private financial information, such as your social security number or credit card numbers.

What is a Good Credit Score?

Why is a Good Credit Score Necessary?

A credit score is a three digit number calculated from your credit report and is used to determine your creditworthiness. A good credit score is crucial for financial independence and success. Not only can it make a difference between whether you are approved or denied for a loan, but it has a huge impact on how much interest rate you will be charged if you are approved. This can mean saving tens of thousands of dollars throughout your lifetime if you have a good credit score!

What is a Considered a Good Credit Score?

Thus, one common question many people have about credit scoring is what lenders consider as a “good” credit score. Although the higher your credit score is, the better, there is no single cutoff. What is considered a “good” credit score depends on the scoring system used by each lender. The lender makes its own decision about where to draw the line, based on how much risk it wants to take.

FICO scores range from a low of 300 to a high of 850. Instead of having a cutoff to approve or deny credit, lenders will have different rates and terms at different segments. Many lenders use scores above 700 as the cutoff for giving borrowers their lowest rates, and others may even use scores above 660. These scores typically suggest that you have good credit management, giving you the ability to negotiate for the best rates. Companies that lend borrowers money below that cutoff are often known as “subprime” lenders.

Since all the lenders can have different standards on what they consider to be a good credit score, it is important to keep building your score to receive the lowest interest rates. Understand the factors that affect your credit score and work to maintain a high credit score. You can check your credit score at MyFico.com.

Improve Your Credit Score

1)      Check Your Credit Report – Improving or repair your credit score starts with getting a free copy of your credit report and checking for errors. Since your credit score is based on information on your credit report, it is crucial that this information is accurate. For example, check to see if there are:

  1. Accounts listed that aren’t yours
  2. Delinquencies, including late payments and charge-offs, that aren’t yours
  3. Negative entries that are more than seven years old (bankruptcies can take 10 years to fall off your credit report)
  4. Incorrect amounts owed

Read more on how to carefully review your credit report!

2)      Pay Your Bills on Time – As discussed in the factors impact your credit score, payment history makes up about 35% of a typical credit score. One late payment can have a major impact on your credit score. The higher your credit score is, the more a late payment can hurt it. Of the factors that affect a credit score, payment history makes up 35% of the typical credit score. Ensuring that all your bills get paid on time is essential.

To help you pay your bills on time, set up payment reminders or automatic payments. It also helps to keep track of what you owe and to whom you owe.

3)      Pay Down Your Debt – How much of your available credit you’re using makes up 30% of a typical credit score. The score looks at how much of your credit limit you’re using on each card, as well as how much of your combined credit limits you’re using on all your cards. The lower your balances are in relation to your credit limits, the better it is for your credit score.

The score also looks at the progress you’re making on paying down installment accounts, such as auto loans and mortgages. It compares how much you owe to what you originally borrowed. Paying down the balances over time shows consistent and responsible credit-handling behavior and this will help boost your score.
Here are tips on how to pay down your debt.

4)      Don’t Close Credit Cards or Other Revolving Accounts – If you want to increase your credit score, don’t close any of current accounts. Ending your accounts can never help your score, and it may actually hurt it. This is because closing your accounts reduces your total available credit, and that makes the gap between your credit limit and the balances you carry smaller. The smaller the gap is, the more it hurts your credit score.

It’s especially important to keep your oldest account active. Closing older accounts can hurt you because the FICO credit score formula takes account the age of your oldest account and the average of all your accounts. Shutting them down can make your credit history look younger than it actually is, and your score can drop as a result. Even if you don’t use those accounts anymore, you should still charge something occasionally because the lenders may decide to close them for you if they see them as inactive.

5)      Apply for Credit Sparingly –Responsible credit users don’t just apply to credit cards from multiple department stores just to get a 10% discount. Although you might save 10% on your current purchase, you can wind up paying more in overall interest, as too many credit applications can lower your score. Responsible credit users don’t apply for credit they don’t need. They try to spread out new credit requests, so that they’re not opening multiple accounts in a short period of time.

Tips to Paying Down Your Debt and Improving Your Credit Score

How much of your available credit you’re using makes up 30% of a typical credit score.  Thus, to improve your credit score, you should keep track of much you charge on each card and always pay down your debt. The less balances you carry, the better it is for your score.

Tip 1: If you have a large balance on one card and the other accounts carry zero balances, transfer some of your debt from that card to the unused cards to improve your credit score.

Doing this can help your score because it is better to have small balances on a few cards than one big balance on a single card. To have a good credit score, you should only use a portion of the available credit limit on each credit card account. However, this will only work in the short run. In order to improve your score in the long term, you actually have to pay down your debt, not just move it from one card to another.

Tip 2: If your goal is to improve your credit score, prioritize and pay down the debts that are closest to the accounts’ credit limits first.

Once the closest has been paid down to below 50% of its limit, you can start paying down the second closest. Although many people argue against this approach and will advise you to pay off your highest-rate debt first because it makes a lot of financial sense, it isn’t the fastest way to improve your credit score.

Tip 3: Avoid consolidating your debts. Although many people want to transfer their balances to a single card to take advantage of a low rate, it is typically better to have small balances spread across all your accounts rather than having a large balance sitting on only one account.

Finding Money to Pay Down Your Debt

Here are a few tips on how to pay off your debt:

1)      Sell your stuff –Sell items you don’t need by organizing your own garage sale, taking them to consignment shops, or auctioning them on eBay.

2)      Trim your expenses – Eat out less often, shop using a grocery list, and find free entertaining things to do instead of going out and spending money. Tracking your spending can also give you ideas on how you can save.

3)      Boost your income – Pick up a part-time job. See if you can find extra work that will boost your income to help you pay down your debt.

Read more tips on how to pay down your debt

The Importance of a Credit Score

Need to apply for a mortgage, auto or a personal loan? Whenever you apply for credit, lenders will check your credit score to see if you qualify for a loan. But what exactly is a credit score and why is it so important?

A credit score is a three-digit number that is a strong indicator of how likely you are to pay back the debt you owe, based on your past borrowing behavior. A higher credit score shows lenders that you are more likely to pay back the money you borrow. Likewise, a lower credit score signals a higher possibility that you may default on your loan. Although many people think that a credit score only matters in terms of whether or not you get approved for a loan, its importance actually goes beyond that. Your credit score can have a significant impact on other areas in your life.

Loans

A credit score is used to determine whether you get approved to borrow money to finance a house or car, your college tuition, or even to start up your own business. In addition, it is also used to determine how much credit you qualify for and what the interest rate of your loan will be. This means that if you have a higher credit score, you will be rewarded with lower interest rates, thus saving you a lot of money in fees.

Having a Low Credit Score

Most of us already know that if you have a low credit score, it is difficult to find a bank or credit card company to lend you money. But unfortunately, having a low credit score doesn’t just stop there. Not only does your score affect whether or not you can borrow money at a low interest rate, but it impacts other areas, such has insurance rates and employment opportunities.

Insurance Rates

Your credit score will likely play a role in determining your premium when you apply for auto or homeowners insurance. A low credit score can cost you hundreds of dollars in additional premiums each year.

Employment

Sometimes employers check your credit history because they believe that it is an indicator of how responsible you are. Many jobs that deal with money on a daily basis require applicants to be responsible in handling cash.

Rent

Many landlords do a credit check on potential tenants. Having a low credit score may indicate to the landlord that you might have trouble paying the rent on time.

Your credit score and history is one of the most vital parts of your financial life. Even if you have a high income, if your credit score is low, you may still be denied for lines of credit. Lenders want to minimize the risk that borrowers will default on their financial obligations. If you have bad credit, it is not the end of the world. By doing your research, you can learn about the factors that impact your credit score and implement ways to improve your credit score.

What is a Credit Bureau?

Credit bureaus, also known as credit reporting agencies, are not lenders, but independent agencies that get information from credit grantors and other sources regarding individuals’ credit behaviors. The organizations compile the information in the form of a credit report and also use this information to create credit scores, which they sell for a fee to creditors and consumers. Banks, mortgage lenders, credit card companies and other financing companies need this information from credit bureaus so they can make a decision on whether or not to grant a loan to an individual. The credit bureau itself does not decide whether an individual qualifies for credit, but rather, it only collects information related to the person’s credit history.

The three major credit bureaus are Equifax, Experian, and TransUnion. Although these three organizations share information, each maintain its own credit report and credit score. These credit reporting agencies calculate credit scores using their particular statistical model. Since there is no specific formula that all the credit bureaus use to calculate a person’s credit score, your score at one credit bureau may be higher or lower than your score at another bureau.

In summary, main roles of a credit bureau are to:
a) provide users with accurate information and help give creditors an objective way of processing credit applications
b) help lenders reduce the risk of granting loans to consumers who are likely to default

Different types of credit scores
The major credit bureaus sell FICO credit scores under different names, but they are all developed using the same methods by Fair Issac.

Credit Bureau                                       FICO Score Name
Equifax                                                    Beacon Score
Experian                                                 Experian/Fair Isaac Risk Model
TransUnion                                            FICO Risk Score, Classic

However, these are not to be confused with the credit bureaus’ own credit score. For example, Experian’s individual credit score is called PLUS, ranging from 330 to 830. Equifax’s Credit Score ranges from 280 to 850. TransUnion’s credit score, called TransRisk, is similar to the FICO score, ranging from 300 to 850. In addition, these three credit bureaus have jointly introduced another credit score called VantageScore to compete with the FICO score. The VantageScore ranges from 501 to 990.

How to Establish Credit

When you don’t have a credit history, it can be difficult and frustrating when you need to obtain a type of loan or get approved for a credit card. However, you might be wondering, if you don’t have credit and no one is even giving you a chance, how can you ever establish credit?

Below are ways to establish credit for the first time:

1)      Use someone else’s good name -You can boost your credit history if you are added to someone else’s credit card as an authorized or joint user. Many issuers will import the history of that account onto your own credit report. However, make sure the person who is adding you is responsible with credit. Although you may be added as an authorized user and are not responsible for paying the bill, the original account owner’s mistakes can still show up in your credit report.

2)      Get someone with good credit to cosign a loan with you – Not only is having a co-signer a good way to build credit, but you can also get a better rate on a loan application. However, make sure that payments are always on time

3)      Set up a checking and savings account – You do not need any credit score to open up a checking or savings account. Although they don’t show up on your credit report, lenders see them as important signs of financial responsibility and stability. When you have an active bank account in good stand, you are proving that you can manage money.

4)      Employment history – Lenders want to see if you are able to hold a job or if there are periods of unemployment. Your ability to hold a stable job can help the likelihood of getting approved for credit.

5)      Have utility bills under your name – Having an electric, gas, telephone, cable, or water service bill in your name and paying them off will show lenders that you are financially responsible.

6)      Residence history – Lenders want to see whether you rent or own. It is helpful if you have a stable residence or if you own a home.

Alternative Cards

If you can’t get a regular credit card, you might want to apply for a gas or department store credit card, which are usually easy to get, or apply for a secured credit card. When used properly, these types of cards can help boost your credit history. However, make sure that the lenders actually report your credit activity to the credit bureaus because otherwise, it will do you no good.