Most credit scores estimate the risk a company incurs by lending you money or providing you with a service — specifically, the likelihood that you’ll fail to make payments in the next two to three years. The higher the score, the less risk you represent. Your score is calculated by a mathematical equation that evaluates many types of information found in the credit file.
Let’s take on the fundamentals of the credit reporting system. From the big three credit bureaus, Trans-Union, Equifax and Experian, to your rights under the Fair Credit Reporting Act, this article will help you navigate the credit report maze.
1. When you apply for a new credit card the creditor requests a copy of your financial history from the reporting agencies.
This causes a “hard inquiry” to be recorded on your credit report.
2. The creditor uses your credit reports and scores along with income and debt information to determine what rates to offer.
3. You start to use the new credit card and the creditor reports your activities to the credit reporting agencies about every 30 days.
4. The credit reporting agencies update your credit report as they receive new information from creditors or lenders.
5. Your credit profile changes based on your financial activity. The next time you apply for a credit card or loan, the process repeats.
- Consumer information (address, birthday and employment)
- Consumer statement
- Account histories
- Public records
- Creditor contacts
When you open a new account, miss a payment or move, these sections are updated with new information. Old negative records will stay on your credit report for 7-10 years.
Positive records can remain on your credit report longer. Not all creditors report to all three agencies and the agencies obtain their data independently so your reports from Trans-Union, Equifax and Experian could be substantially different from each other.
That’s why it’s important to check your three credit reports every 6-12 months to ensure that the information is accurate and up-to-date.
HOWEVER… we suggest you subscribe to a credit monitoring service. Contact us for our favorites.
Contact a representative today to sign up!
Keeping your credit reports healthy will improve your credit scores and help get you the best rates on major purchases. We recommend that you check your credit reports every 6-12 months or at least 3 months before a major purchase in order to guard against damaging inaccuracies and identity theft.
Routine check-ups along with paying your bills on time, keeping your credit card balances below 35% of their limits and correcting any negative inaccuracies will help you maintain a healthy credit profile.
Your score ranges from 300 to 850, but the majority of scores fall within the 600s and 700s. Higher scores indicate a lower credit risk. For a score to be calculated, your credit report must contain at least one account that has been open for six months or more, and at least one account that has been updated in the past six months.
As your data changes at the credit reporting company, so will any new score based on your credit report. So your FICO® score from a month ago is probably not the same score a lender would get from the credit reporting company today
While each person’s individual credit profile can be improved in its own way, there are five basic things that everyone can do to give their credit scores a boost:
1. Be punctual – Pay all your bills on time each month. Late payments, collections, and bankruptcies have the greatest negative effect on your credit scores.
2. Check your credit reports regularly and take the necessary steps to remove inaccuracies – Don’t let your credit health suffer due to inaccurate information. If you find an inaccuracy on your credit report contact the creditor associated with the account or the credit reporting agencies to correct it immediately.
3. Manage your debts – Keep your credit card account balances below 35% of your available credit limits. For instance, if you have a credit card with a $1,000 limit, you should try to keep the balance owed below $350.
4. Give yourself time – Time is one of the most significant factors that can improve your credit score. Establish a long history of paying your bills on time and using credit responsibly. You may also want to keep the oldest account on your credit report open in order to lengthen your period of active credit use.
5. Avoid excessive inquiries – A large number of inquiries occurred over a short period of time may be interpreted as a sign that you are opening numerous credit accounts due to financial difficulties or overextending yourself by taking on more debt than you can easily repay. Apply for new credit in moderation.
A poor score will haunt me forever.
Credit scoring is unfair to minorities.
Credit scoring infringes on my privacy.
My score will drop if I apply for new credit.
Just the opposite is true. A score is a “snapshot” of your risk at a particular point in time. It changes as new information is added to your bank and credit bureau files. Scores change gradually as you change the way you handle credit. For example, past credit problems impact your score less as time passes. Lenders request a current score when you submit a credit application, so they have the most recent information available. Therefore by taking the time to improve your score, you can qualify for more favorable interest rates. HOWEVER, any derogatory information will stay on your credit file for 7 years and Bankruptcy’s will stay on your file for 10 years.
Scoring considers only credit-related information. Factors like gender, race, nationality and marital status are not included. In fact, the Equal Credit Opportunity Act (ECOA) prohibits lenders from considering this type of information when issuing credit. Independent research has been done to make sure that credit scoring is not unfair to minorities or people with little credit history. Scoring has proven to be an accurate and consistent measure of repayment for all people who have some credit history. In other words, at a given score, non-minority and minority applicants are equally likely to pay as agreed.
Credit scoring evaluates the same information lenders already look at – the credit bureau report, credit application and/or your bank file. A score is simply a numeric summary of that information. Lenders using scoring sometimes ask for less information – for example, fewer questions on the application form.
If it does, it probably won’t drop much. If you apply for several credit cards within a short period of time, multiple requests for your credit report information (called “inquiries”) will appear on your report. Looking for new credit can equate with higher risk, but most credit scores are not affected by multiple inquiries from auto or mortgage lenders within a short period of time. Typically, these are treated as a single inquiry and will have little impact on the credit score.
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