This is article seven of Part One of the “Conquering Debt Series.” Read article six of Part One here.
If you have financial issues, you should try to learn the truth about your credit report. Knowing what’s in your credit report and how it works will help you understand what you can and cannot do to improve your credit record.
You can never hide your credit problems, but there are a few simple steps that you can take to make sure that your credit report is accurate and that any helpful information is included.
WHAT IS A CREDIT REPORT?
Let’s get this question out of the way. Your credit report, or credit history, is a record of how you have borrowed and repaid debts.
There are currently three major national credit bureaus: Experian, Equifax, and TransUnion.
Your report not only includes a record of your history and description of your credit accounts, but it also contains basic personal information about you. These things can consist of your Social Security number, birth date, current and former addresses, and your employers.
The accounts that are listed on your credit report will also contain:
- date you opened the account
- the type of account (such as real estate, credit card, or installment)
- whether the account is currently open or closed
- monthly payments
- maximum credit limit
- latest activity
- current balance
- any amount that is past due
Each account includes a code that explains whether the account is current, thirty days past due, sixty days past due, or ninety days past due, or if the account involves a charge-off, collection, or settlement.
Every credit report should also list the addresses and telephone number of your creditors, which you can use to contact them to dispute any inaccurate information they put in your report.
Have you ever wondered which debts or if any of your debts have been turned over to a collection agency? Your report will list those accounts with any court judgments, garnishments, tax liens, foreclosures, or bankruptcies.
HOW DO THE CREDIT BUREAUS COLLECT INFORMATION?
Most, if not all, major creditors have to subscribe to one or more credit bureaus. When they do this, it acts as a two-way street. The creditor supplies the credit bureau with current account information on its customers and will obtain credit report information about other applications in exchange.
Usually, creditors supply information to the credit bureaus by computer and typically do this on a monthly or regular basis. The bureaus use this information and update each borrower’s credit file automatically.
HOW TO REVIEW YOUR CREDIT REPORT
The first step in learning about your credit report is to order copies from the three major credit bureaus and look over it thoroughly. Why do you request your report from all three bureaus? There can be differences in your reports kept by each of the three major national credit bureaus.
You can order a copy of your report online, in writing, or by telephone. You are entitled to ONE free copy of your report EVERY year from all three bureaus, but you must order from the centralized request service.
Keep in mind; it might be easier to order your report by mail or phone. When you order your reports online, you will be asked additional security questions that some people find hard to answer.
- Go to www.annualcreditreport.com
- Calling 1-877-322-8228
- Completing the Annual Credit Report Request Form by clicking on “request your report through the mail” and mailing it to:
Annual Credit Report Service
PO BOX 105281
Atlanta, GA 30348-5281
A WORD OF CAUTION
There are a ton of advertisements that claim to provide free credit reports or scores. These are not really free! They use introductory teasers that convert to an expensive subscription service. Federal law requires these companies offering free credit reports other than www.AnnualCreditReport.com to put a warning in their advertisements stating, “This is not the free credit report provided for by Federal Law.”
You can also get free copies if:
- you have been denied credit within the past sixty days
- you are unemployed and will be applying for a job within the next sixty days
- you are receiving public assistance
- you have reason to believe that the file at the credit bureau contains inaccurate information due to fraud
WHAT HAPPENS IF YOU ALREADY RECEIVED YOUR FREE COPY AND WANT ANOTHER?
If you have already accessed your free annual report and other special circumstances that are discussed above do not apply to you, credit bureaus can currently charge you no more than $11.50 per report. This is the maximum charge, not a required fee.
The credit bureaus have developed various packages or services that cost a lot more. For example, the three major bureaus offer a “three-in-one” service that allows you to get all three reports at once, sometimes with a credit score, but it costs about $30-$40.
HOW DOES CREDIT SCORING WORK?
Your credit score is just a number that summarizes your credit history. The primary purpose of your score is to help lender evaluate whether you are a risky borrower. Depending on which credit bureau you look at, your score might be different. The most popular type of credit score is the FICO score, which ranges from 350-900. Anything over about 750 is considered to be a very good score by most lenders.
HOW TO IMPROVE YOUR CREDIT SCORE
I could literally write a whole book on this topic, but in this article, I am only going to talk about the most popular ways.
The best way to improve your score is to start paying your bills on time and to keep balances low. If you have debt or are having financial difficulty, this can be hard to do.
The critical factors disclosed with your score should help you pinpoint what credit information is hurting your score the most, and you can focus on improving that particular area.
WHAT ARE THE CREDIT SCORING FACTORS
Each credit bureau and credit scoring company has a slightly different way of calculating credit scores. This is the reason you might see a slight difference in your score depending on whose score you are looking at (Experian, Equifax, or TransUnion).
The credit scoring company FICO has disclosed the factors it considers in generating credit scores. This is precious information!About 90% of the credit scores used by creditors are FICO scores.Click To Tweet
According to FICO, the factors include:
- Payment history – 35%
- Amounts owed on credit accounts compared to available credit – 30%
- Length of credit history – 15% ( In general, a longer credit history increases the score)
- New credit – 10% (you get more points in your score if you have an established credit history and don’t have too many new accounts)
- Types of credit – 10% (FICO looks for a mix of different types of credit.)
One of the best strategies, when you are having financial difficulties, is to check your credit reports for errors or old information. You can also try to explain a bad score to creditors. The creditor can’t do a lot to change your score with the credit bureau, but they can override the score as an important factor when deciding to grant you credit.
You need to explain in detail your reasons for problems on your credit report. For example, loss of a job due to an illness may explain an old default. If you have returned to work, the creditor may grant you a loan on good terms if you can prove your income, even if your score is low.
Even if a creditor denies you or does not respond well to your explanation, you have the option and choice to shop around. Other creditors might be more flexible.
SHOPPING AROUND AND YOUR SCORE
Have you ever heard that a large number of credit inquiries will lower your credit score? This is not always true.
You should never be afraid to shop for the best credit for your situation just because you are worried that too many inquiries will hurt your credit score.
For some types of credit, such as mortgages or car loans, the credit scoring systems will count multiple inquiries during a specified period, such as 15 or 30 days, as only one inquiry. The system does this because it assumes you are shopping around.
Even when a credit scoring systems do count a large number of inquiries against you, the developers claim that this will have only a small impact on your score. Other factors are much more critical.
Most importantly, getting affordable credit and paying it off each month will outweigh any harm caused by too many inquiries.
HOW TO GET YOUR SCORE
Under federal law, credit bureaus are required to provide consumers with a credit score upon request. Just keep in mind, this is not free, nor is it likely to be the same score that the creditors use.
The bureaus usually sell you an “in-house” or “educational” score or a “VantageScore,” which ARE NOT the same as your FICO score.
One out of five times, your educational credit score is significantly and meaningfully different than your FICO score.
There are some cases where the bureaus are required to give you your credit score for free. The Dodd-Frank Wall Street Reform and Consumer Protection Act, states that if a creditor rejects you or charges you a higher price for credit based on your credit score, it must give you a copy of that score and related information. Mortgage lenders are also required to provide you with your score for free.
One of my favorite tools for keeping an eye on my credit score is Credit Karma. Not only does it give you your credit score for free, it will alert you via email if anything changes on your credit report.
Even though your credit score itself is essential, the factors that pulled your credit score down are nearly just as important. Along with the score itself, the bureaus have to provide the top four factors that most affected your score.
This information is critical because knowing what goes into the score will help you figure out whether there is anything you can do to improve your score.
The bottom line is that if you have debt or are going through financial troubles, knowing your score and reviewing your report are essential.
COMPLETE CREDIT REVIEW CHECKLIST
Get my essential guide that will help you review your credit report, increase your credit score, and dispute harmful information!
Have you looked at your credit report recently? Let me know about it in the comments below.