Credit Report Basics
Why do I need credit? Eventually, you’re going to buy a house or a car, or just tires for your car. Creditors offer you credit when they agree to give you money, goods, or services and allow you to pay for it over time.
A credit report is a summary of your previous credit history and contains information pertaining to how you’ve managed your credit in the past. This information stays on your credit report for at least seven years.
Maintaining positive information on your credit report, such as making on-time payments, will give you more credit options and more favorable interest rates in the future.
What Information Appears on My Credit Report?
There are several categories of information that appear on your credit report. Let’s break down the most common areas.
Personal Information
Basic identifying information appears on your credit report, including current and former names and addresses. Your social security number and birth date are included as well as phone numbers and contact information.
Alerts
This is where any red flags are reported. These may include ID and address discrepancies or show excessive inquiries, for example.
Employment
Recent employment dates and information are listed here.
Public Records
Any liens or judgments against you that are part of public record will appear here. If you have filed for bankruptcy, this would appear as well.
Credit Accounts
This includes any type of current and past credit accounts you have used. These may be broken down into categories such as revolving accounts and installment accounts. Each account shows your high credit limit, when the account was opened, current balance, payment history, past due status, and credit rating.
Inquiries
Finally, creditors are interested in how much credit you’ve already requested. Inquires sometimes cause your credit score to dip slightly.
Who Looks at my Credit?
In what situations is my credit reviewed? Any time you want to apply for some kind of credit account, your potential creditor will check your report. Your credit history gives the creditor an idea of how creditworthy you are (the likelihood that you’ll pay on time). Oftentimes, better credit = a lower interest rate and better terms.
However, other entities are also interested in your report as it helps show how responsible you are as an individual. A few examples of situations when you may have your credit reviewed:
- Applying for a job
- Renting an apartment or house
- Buying insurance
- Setting up utilities
How Can I Get a Copy of My Credit Report?
Getting a copy of your own credit report is fairly simple. There are three main consumer credit report agencies — TransUnion, Equifax, and Experian. Normally you can request your report for free from each of these agencies once a year. However, due to COVID-19, an exception was made, which has now been extended through April 2022. This exception allows you to pull your report weekly through all three bureaus for free. Just visit annualcreditreport.com.
What Is A Credit Score?
At its most basic, a credit score is a three-digit number which indicates the likelihood and your capacity to repay borrowed money. While there are different scoring ranges based on what you’re borrowing for, the scores typically range from 300 to 850, and that’s what we’ll use for examples in this blog.
However, a credit score is much more than a number. These three-digit numbers represent a snapshot of your credit standing and, the better your score, the more favorable rates you may qualify for when borrowing money. Your credit score may also be reviewed when applying for jobs, renting a place to live, setting up utilities, or even buying insurance.
How Credit Scores Work
A credit score is derived from the following five factors: Payment history, credit utilization ratio, length of time you’ve had credit, number of inquiries, and credit mix. The better your score, the more borrowing options you should have from potential lenders.
While several factors are used when deciding to extend credit, lenders use credit scores to get a snapshot of your credit history. However, the credit score doesn’t show the whole picture, and most lenders do not make loans based solely on someone’s credit score.
Factors That Affect Your Credit Score
There are five main factors evaluated when calculating a credit score. The percentages below are based on the Fair Isaac Corporation (FICO) score, which is widely accepted. It is not the only credit score or range out there, but is a general representation.
- 35%, Payment history – While on-time, in-full payments can help your score. Missed loan payments or defaulted loans can hurt it.
- 30%, Credit utilization ratio – This is the total amount you owe vs. how much credit you have available.
- 15%, Length of credit – This refers to the length of your credit history.
- 10%, New credit/Recent inquiries – Have you opened new accounts recently or applied for credit multiple times in the recent past.
- 10%, Credit mix – This refers to the mixture of different types of debt such as auto, home, installment loans, and revolving credit, such as credit cards.
Credit Score Ranges
Bad/Poor credit score, 300 – 579.
Traditional lending options may not be available. You may need a co-signer or use collateral to secure a loan. You may pay higher interest rates.
Fair credit score, 580 – 669.
Potentially, higher credit limits, lower down payment amounts, and better loan and credit terms.
Good credit score, 670 – 739.
Most lending options should be available to you. Credit scores in this range mean you’re more likely to be approved for a loan and have interest rates lower than lesser scores.
Very Good credit score, 740 – 799.
Credit scores in this range often come with even more competitive interest rates.
Exceptional credit score, 800-850.
Most lending options should be available, and you should qualify for the best rates.
Tips to Boost Your Credit
As shown in the factors that affect your credit, there are a number of reasons your score can change. The score can increase or decrease depending on the type of new information introduced. The major credit bureaus pull information monthly, but it may take up to 90 days for changes to show on your credit. It is important to remember that information stays on your credit for at least seven years.
Pay Your Bills on Time
Making on-time, in-full payments is one of the best ways to boost your credit. However, making late payments does the opposite. Ensure timely payments every single time, and you’ll be on your way to increasing your score. Consider auto-pay options if available so you don’t accidentally forget a payment, or set this up through your bank.
Monitor your credit utilization ratio
Keep your use of credit to manageable levels. Having credit lines maxed out can be a red flag to lenders. Ideally, you want to keep this below 30%.
Request a credit increase
Inquire about increasing your credit limit on accounts. Note that you can maintain a lower credit utilization rate by not spending this extra amount. For example, if you have an $800 limit and a $200 balance, your credit utilization ratio is 25%. If you raise your credit limit to $1,000 and maintain your $200 balance, then it drops to 20%.
Keep accounts opened
If a line of credit is no longer in use, just stop using it instead of closing the account. Keeping it open does two things. 1) It keeps your credit utilization ratio from dropping due to having less credit available, and 2) It keeps the length of your credit history intact. Based on how old the card is and the credit limit on it, closing the account could negatively affect your credit.
Credit Age and Credit Mix
Again, having credit for extended periods of time raises the average age of your accounts. Additionally, having more than one type of credit earns you more credit score rewards. For instance, credit cards, auto loans, and personal loans are different types of credit that contribute to your mix.
Credit Scores are just one measure of creditworthiness. On their own, they do not determine whether or not a person’s loan will be approved. They are an assessment, and lenders use them as a tool. To improve your credit scores, show that you are a seasoned, responsible borrower who is likely to repay on time.
Sources*:
https://www.investopedia.com/terms/c/credit_score.asp
https://www.nerdwallet.com/article/finance/credit-score-ranges-and-how-to-improve
https://credit.org/blog/what-is-a-good-credit-score-infographic
https://corporatefinanceinstitute.com/resources/knowledge/finance/credit-score
https://www.creditkarma.com/credit-scores
https://www.thebalance.com/how-credit-scores-work-315541
*Neither Sunset Finance nor Flight Finance are affiliated with these publications or companies.
Understanding Your Credit Report
Reading your credit report for the first time may be confusing. There’s a lot of information included about your loans, credit lines, and accounts. Checking your credit report from each of the three credit reporting bureaus each year and understanding the information is an important part of your financial health.
Everyone who has a social security number has the right, by law, to see each of their credit reports for free once every 12 months. You can order your free credit reports online by visiting www.AnnualCreditReport.com or by calling 1-877-322-8228. This website is the only one authorized by federal law to offer free credit reports to consumers.
How credit reports are organized
There are four sections of everyone’s credit report. Your personal information may include your full legal name, as it appears on your social security card, and any other former names or aliases you’ve used. You may also see your current address and employer as well as past employers and addresses.
- The credit summary section offers information about the total number of accounts you have and their balances. You’ll see the number of current and delinquent accounts here. Closed accounts, public record accounts, and inquiries made into your credit history during the past two years are in this section too.
- The account history section is the largest part of your credit report. It has details about each of your current accounts and your payment history. In the summary for each account, you’ll see the name and address of the creditor. They’ll list the account number, the date you opened the account, and the status of the account. Details like the original amount of the loan or the credit limit on the account, whether the account is joint or individual, and the type of account are here too.
- The third section is a detailed description of any negative information like accounts that are in collections, liens, bankruptcies, and court judgments. Negative information stays on your credit report for seven years after the incident.
- The fourth section of your credit report offers information about each time a company or potential creditor asked to see a copy of your report. You must authorize credit checks known as hard pulls. These happen when you apply for credit or ask for a credit limit increase on a current account. Applying for housing or a new utility account may also result in a hard inquiry into your credit history. This type of inquiry may cause a slight drop in your FICO credit score.
Soft inquiries don’t need your approval, and they don’t hurt your score. Companies initiate soft credit inquiries when they prequalify you for a loan or line of credit. You may also give potential employers permission to check your credit, which results in a soft pull.
It’s a good idea to get into the habit of checking your credit reports regularly. Look for information you don’t recognize and make sure your credit report reflects your on-time payments.
When it comes to FICO scores, new information can be more important than old information. If your credit report has negative items on it, don’t get discouraged. Making your installment loan payments, car payments, and credit card payments on time every month helps build the kind of reliable credit history you need to see your score rise over time.
Common Credit Myths
Myths and misconceptions abound when it comes to credit reports and scores. This can make the whole topic seem very confusing to many people. Some people can negatively affect their credit without realizing it because they followed the advice offered by one of these myths.
Let’s help clear up some of these misconceptions by busting a few of the most common credit myths we hear about.
1. Checking My Credit Report Will Hurt My Credit Score
You’ve probably heard that applying for a new type of credit will hurt your credit score. When you’re applying for a credit account, creditors will pull your report. This results in a hard inquiry, which may bring your score down a few points.
However, that is different from simply checking your credit report. Accessing your report with no credit application in progress does nothing to affect your score and is actually a good idea. Checking your credit report frequently will help you catch any possible discrepancies which may affect your credit.
2. I Only Have One Credit Score
There are a variety of services which offer credit scores, and there are different scoring models that can be used. For this reason, it’s likely that your creditor could be seeing a slightly different score than what you expect. It is usually not enough to make that much of a difference, but good to be aware of.
3. Carrying a Balance Will Improve My Credit Score
We’re not really sure how this myth got started. Having a balance in itself doesn’t matter. What’s more important is that you aren’t maxing out your balances for credit-utilization purposes and that you’re making your scheduled payments on time. When possible, pay off your credit card balances in full monthly.
4. I Have to Pay to Get My Credit Reports
Accessing your credit information doesn’t cost you anything. The three major credit reporting agencies normally let you access your report for free once a year. However, when COVID-19 came around, they started letting you check your credit once every week. This was initially set to go through April of 2021 but has been extended through April of 2022. Just go to annualcreditreport.com. These reports do not provide a score, just a detailed list of all your credit activity.
You can also get free reports if you are unemployed and looking for a job, are on welfare, have been denied employment or credit because of a fraudulent inaccuracy.
5. Getting Loans Estimates from Multiple Lenders Will Hurt My Score
This myth probably comes from the idea that if you apply for a bunch of different types of credit, your score goes down because of multiple inquiries. However, you can inquire about the same type of credit with multiple lenders within a certain timeframe. This allows you to shop around with different lenders for the same type of credit account without negatively affecting your score- for example, car loans and mortgages.
6. Closing Credit Accounts Will Improve My Score
Remember your credit utilization ratio? More available credit in proportion to the credit you’re using gives you a lower utilization rate, which is a positive thing. Closing accounts lowers the amount of available credit, causing your utilization rate to go up proportionately. This also takes away from your length of credit history, which is another factor that goes into calculating your credit score.
7. There Are Only Three Credit Reporting Companies
Correction: There are only three major credit reporting agencies. Those three — TransUnion, Equifax, and Experian — are the ones you hear about the most. However, there are actually several consumer reporting agencies that compile information for many purposes. These include tenant screening, employment, insurance, utility bills, etc.
Is Credit Counseling Worth It?
If you’ve had credit problems or challenges with your personal financial situation in the past, you may have considered hiring a credit counseling agency to help. According to the Urban Institute, 71 million Americans had at least one debt in collections in 2017. Overwhelmed, they may search for help from a credit counseling service.
Some agencies specializing in credit counseling help consumers by assisting with setting up a budget, offering education about credit use, and even walking people through a debt repayment plan. Unfortunately, there are individuals and companies who also prey on consumers who are hoping to improve their credit standing. Typically, these consumers have had issues with their creditworthiness in the past and now are trying to “fix” previous issues.
Don’t pay for a higher credit score
The truth is you can’t erase legitimate delinquent account information, and raising your credit score takes time. Companies who promise a quick fix in exchange for a fee may be using tactics that are ineffective, such as having you dispute valid accounts. Financial institutions such as banks, loan companies, and credit card issuers are required by federal law to report credit accurately, so disputing an account just for the sake of it only wastes yours and the company’s time.
A better option is to find a way to pay off old debts. This will show that even though the account was in collections, it has now been satisfied. Of course, paying all of your current obligations on time is a must as well. Building a budget can help you get organized and stay on track.
Beware of these red flags when evaluating credit counseling companies:
- High upfront fees
- Required access to bank accounts
- Unethical credit repair practices like disputing valid accounts
- Pressure to sign up immediately
- Pressure to give payment over the phone or collect financial information that could be used to access accounts
Before you hire a credit counseling company, check to make sure they are certified or accredited with one of these agencies:
- The National Foundation for Credit Counseling
- The Financial Counseling Association of America
- The Council on Accreditation
Also, check with your local Better Business Bureau for complaints against the company. While many credit counseling companies hold non-profit status, that doesn’t automatically mean they are trustworthy. It’s always best to visit the company location in person and try to work with someone locally.
Identifying and Avoiding Scams
“We can get you a new — legal — credit identity!”
“Say goodbye to bad credit with our 100% guaranteed program!”
“We can remove negative credit items in a snap!”
Unfortunately, the credit industry is rife with scams. There are countless people and agencies out there looking to take advantage of people when they’re down. That doesn’t mean that you shouldn’t hire someone to help you get your credit back on track — there are plenty of good-hearted people who do want to help. However, it does mean that you have to be vigilant when hiring.
Check out some of the red flags you should watch for in order to identify and avoid scams below. Plus, learn how to protect yourself against scammers before it’s too late.
Credit Repair Scam Red Flags
“Give us all your money now!” They might not say it quite so brusquely, but many scammers will charge hefty upfront fees while making grandiose promises. Unfortunately, they won’t fulfill those promises. To them, it doesn’t matter because they’ve already got your money.
Legitimate credit repair companies charge modest monthly fees for their services. Never pay a large sum upfront.
Another big red flag to watch out for is the promise to wipe your credit report clean of all negative information. The only information anyone can change or remove from your credit report is incorrect information. If the negative marks on your report are legitimate, no one can remove them. So if you are being promised a pristine credit report, you should be extremely wary.
Scammers will also tell you not to contact other credit reporting agencies or creditors. This is usually because they don’t want you to realize the fishiness of their operating practices. You are free to contact other agencies and creditors as much as you please — anyone who tells you differently is probably hiding something.
Keep Your Information Safe
In this day and age of identity theft, you have to be vigilant about protecting your personal information. This is particularly true when you’re handing out your information to someone else to help with credit repair.
Here are a few steps you can take to keep your information safe:
1. Initiate a Security Freeze or Fraud Alert
A great way to protect yourself is to restrict access to your information without your approval. With a security freeze, no one can open a new account or access your credit report without your explicit permission. This freeze is free to apply and will last until you cancel it.
With a fraud alert, businesses can access your credit report, but they must take certain extra steps to verify that the applicant is really you.
2. Keep an Eye on Your Statements
It’s easier to limit the damage of identity theft when you catch it early. A good way to do this is to keep a close eye on your bills, financial statements, medical information, and other important documents. Remember, anything that you use your personal information for, thieves can too.
3. Be Skeptical
Fraudsters will reach out to you through text, email, telephone calls, and other means to get your attention. They will often lead with shocking titles like “Identity Theft Alert” or “Credit Score Change Alert” or ask you to verify personal information.
Always be skeptical of these types of messages. Never click on the links or download attachments from suspicious emails.
4. Choose a Monitoring Service
Keeping up on this can seem like a big job. Remember, you can hire a credit monitoring service to take care of the month-to-month mundane activities. However, do your due diligence beforehand and ensure you are hiring a reputable service.
You can also get a certain amount of “credit monitoring” for free by taking advantage of account alerts offered by your bank. You can receive alerts by email or text about low balances, large purchases, available credit, and more.
Eyes Wide Open on Your Personal Information
The financial world might be full of scammers, but there are plenty of ways to protect yourself. All it takes is a bit of suspicion and vigilance. Once you make these habits part of your life, you won’t even notice them anymore, and you’ll be far less likely to be a victim of identity theft.