credit score

Your Credit Report-The Basics

Every time you apply for credit, you’re giving lenders permission to see your credit report. Don’t you think it is important for you to see what they are seeing? Be proactive and check your credit report on a regular basis. By reviewing your credit report and understanding what is on it, you will be prepared for negotiations with lenders and will be able to detect the early warning signs of fraud or identity theft.

How to obtain your credit report
You should review your credit report from the three major U.S. credit reporting agencies (Equifax, Experian, and TransUnion):

• At least once a year
• Especially before making a large purchase, like a house or a car

Free credit reports
You are entitled to one free credit report from each of the three major credit agencies once a year. In order to obtain a free credit report you must order it through Annual Credit Report.com

In addition, you’re entitled to a free credit report:

• Within 60 days of being denied credit, insurance, or employment
• Once a year if you’re unemployed and plan to look for a job within 60 days
• If your creidt report is inaccurate because of fraud or identity theft

Did you find an error?
In review of your credit report annually for accuracy, if you find an error you will want to request dispute form from the credit reporting agency. You may find the error is only reporting on one of the bureaus and not all three. Be sure and obtain the correct paperwork from the bureau reporting the error. If the error is reporting to all three, make sure you follow the specific instructions for each one. The agency will then investigate and must respond to you within 30 days. Only the credit agencies can correct the data on your report.

• Equifax: 1-800-685-1111
• Experian: 1-888-397-3742
• TransUnion: 1-800-916-8800 

How mistakes are made
Often times when a credit report contains errors, it may be because the report is incomplete, or contains information about someone else. This typically happens because:

• The person applied for credit with name variations (Jim Smith, James Smith, Jr., Sr. etc.).
• Someone made a clerical error in reading/entering name or address information from a hand-written application.
• The person gave an inaccurate Social Security number, or the lender misread the number.
• Loan or credit card payments were inadvertently applied to the wrong account.

Some incorrect data, however, may be an indication that you have been the victim of fraud or identity theft (for example, someone has applied for credit in your name or used your credit without your permission). By reviewing your credit report annually you should be able to catch these mistakes and take action to correct the error or take the required steps to report the fraudulent activity.

A good credit history can open a world of financial opportunity. The following are just a few things a good credit report can influence, and why you should know where you stand.

• Big purchases. Good credit can help you secure financing to buy larger items like furniture, a car, or a new home. Your credit history is a portion of what affects a lender’s decision to give you a loan, the amount you can borrow, and what interest rate you will pay.

In addition, your credit history can influence:

• The day-to-day. You may need good credit for some basic matters like having utilities turned on or getting a cell phone.
• Jobs. Employers more and more often are checking credit reports of prospective employees. A solid credit history represents to a potential employer your ability to manage your job responsibly.
• Education. Credit can affect your ability to get a loan to help cover tuition.
• Your business. Personal credit can affect your ability to get a loan to start or grow a small business.
• Insurance. Credit history is often a factor in determining your auto, homeowners, and renter’s insurance rates.

Maintain Your Good Credit

By following the tips below, you can be sure to keep your credit score where it needs to be:

• Pay your bills on time. Late payments and collection accounts will have a major negative impact on your score.
• If you have missed payments, get current and stay current. The longer you pay your bills on time, the better your credit score. Do be aware that once you have paid off a collection account, it will show as a “paid collection” account on your credit report for seven years.
• Contact your creditors or a credit counselor if you’re having trouble making payments on time. By working out a payment plan you can begin to manage your credit and pay on time. This will not improve your score immediately, but your credit score will get better over time.
• Keep your balances low on credit cards and other “revolving credit.” High outstanding debt can affect your credit score.
• Pay off debt rather than moving it around. The most effective way to improve your score is by paying down your revolving credit, not transferring balances between cards.
• Don’t close unused credit cards as a short-term strategy to raise your score. Owing the same amount but having fewer open accounts may lower your score.
• Don’t open new accounts or credit cards you don’t need, just to increase your available credit. This approach could backfire and lower your score.

Understand the length of your credit history
If you are new to having credit, don’t rush out and open a lot of new accounts. New accounts will lower your average account age. This will have a large effect on your credit score if you do not have a lot of other credit. Additionally, a rapid account buildup will look like a larger credit risk to a creditor if you are a new credit user.

Getting new credit

• Do your rate shopping within a focused period of time. FICO scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur.
• Re-establish your credit history. Even if you’d had problems in the past, opening new accounts responsibly and paying them off on time will raise your score in the long term.

Manage the types of credit you have

• Apply for and open new credit accounts only as needed. Do not open accounts just to have a better credit mix, it probably won’t raise your score.
• It is OK to have credit cards- but manage them responsibly. In general, having credit cards (and paying them on time) will raise your score.

Remember the 20/10 Rule: Never let your credit card debt get to be more than 20% of your total yearly income after taxes. And each month, don’t have more than 10% of your monthly take-home pay in credit card payments.

Once you have established your credit history, the most important thing is to keep control of it so you can achieve your financial goals without getting too far into debt.