What to Know About Credit Reports and Credit Scores

A credit report is a vital tool that reveals important information about your financial history. It is used by banks and other companies when deciding whether to do business with a person or not. A person with good credit will qualify for lower interest rates on credit cards and loans because they are (according to credit score statistics) more likely to pay their bills on time. Credit reports are complicated beasts (we’ll be writing many more posts on credit scores and credit in general!), so this article just strives to provide you with some fundamentals to begin to develop your financial literacy in this space.

Free Credit Reports

Under the Fair and Accurate Credit Transaction Act (FACTA), consumers have the right to receive a free credit report from each year from Equifax, Experian, and TransUnion. Experts recommend obtaining a report from a different company every four months or so in order to effectively monitory your credit over the course of the year.

Credit Scores

Credit scores are used to determine a person’s credit-worthiness and provide creditors with a quick and efficient way to evaluate a person’s credit application. The higher the credit score, the more likely it is that the person will repay any loans. These numbers are determined by FICO (Fair, Isaac and Co) and are given to Equifax, Experian, and TransUnion. Credit scores range from a minimum of 300 to a max of 850. A credit score that banks view as “good” is typically 690 to 720 or so, though there is no official range. Experts say that people with credit scores between 620 and 659 are three times more likely to not repay a loan, and people with scores less than 620 are eight times more likely not to repay a loan.

What Factors Go Into Computing A Credit Score

There are five factors used to compute a credit score, all of which come directly from the credit report. Points are awarded based on a person’s payment history, amounts owed, length of credit, types of credit, and new credit accounts. These points are then added up to find the total, which becomes the credit score.

Errors On Your Credit Report

It is very important for consumers to keep an eye on their credit report for inaccuracies, since so much is dependent upon the information contained in the report. If a mistake is found, it should be fixed as soon as possible. Make sure the address is correct, that all the accounts listed on the report are truly your accounts, and verify that all accounts that you know are paid off are shown as closed.

If a mistake is found, send a letter to the credit bureau and ask them to investigate the items in question. Always enclose copies of documents that support your claims, like cancelled checks and receipts. If the bureau cannot verify the disputed information, they are obligated to remove it from the credit report and they must then send a revised copy to anyone that received the report in the previous six months. If your dispute isn’t resolved, the credit bureau must provide a summary of the disputed items and an explanation of why it is valid.

Quick Tips on How To Improve Your Credit Score

Many benefits accrue to those with good credit scores, including obtaining loans at lower interest rates. Since credit scores change over time according to a person’s credit and financial practices, it is possible to improve one’s credit score. Here are several ways to increase your credit score:

  • Pay off all outstanding debt, or pay down as much as you can.
  • Review your credit report throughout the year and request that any incorrect or outdated information be removed.
  • Each time an inquiry is made to your credit history your credit score runs the risk of being adversely impacted, so refrain from applying for more credit unless you really need to.
  • Always pay your bills on time. Late payments can appear on your credit report and negatively impact your score.
  • If you’ve had credit cards open for a long time, keep them open. Providing a long (and strong) credit history is an important factor in calculating your score.
  • Close any new accounts with high limits that are not being used.
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