Credit Scores, Credit Reports, and Credit Bureaus

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Credit Scores, Credit Reports, and Credit Bureaus

Credit is an important measure of trust among banks and financial institutions. Typically, credit refers to a form of deferred payment. Understanding credit scores, credit reports, and credit bureaus is key to maintaining a reputable and healthy financial life.

What is a credit score?

Your credit score is a number between 300-850 that estimates your credit risk to a lender. Your credit score influences your eligibility for different types of credit, including auto loans, home loans, and credit cards. When you apply for a line of credit, the lender uses your credit score to determine the terms and availability of credit.

What is a credit report?

An individual’s credit report is the single most important determinant of their probability of securing loans and other forms of credit. This record of an individual’s record of borrowing and repayment includes information about late payments, bankruptcy, and other issues that may impact credit worthiness.

What information is included in a personal credit report?

Credit reports can cover a broad array of personal information, including:

  • Federal district bankruptcy records and state and county records of tax liens and judgments.
  • Specific information about credit accounts, including opening date, credit limit or loan amount, monthly payment, and payment patterns.
  • The names of those that have sought to view your credit report.
  • Identifying information, like name, address, phone number, Social Security number, date of birth, and current and previous employers.
  • Statements of dispute that allow consumers and creditors to report the factual history of an account.

What is a credit bureau?

Credit bureaus compile credit information from thousands of different sources and sell credit reports and credit scores. Credit bureaus are officially called consumer reporting agencies (often abbreviated to CRA). The three nationwide credit bureaus in the United States are Experian, Equifax, and TransUnion.

How is my credit score determined?

The precise algorithm used to determine your credit score is not public information. In fact, it is likely that you have a few slightly different scores. The three nation-wide consumer credit bureaus (Equifax, Equiline, and TransUnion) have different methods of calculating credit scores, often producing slightly different results. However, your credit score is by no means a mysterious, unpredictable number. Here is the typical breakdown:

  • 35% - Payment history
  • 30% - Amounts owed on credit cards
  • 5% - Length of credit history
  • 10% - New credit inquiries
  • 10% - Variety of credit

Your score for payment history, which is weighted most heavily in your credit score, is determined by whether or not your payments are being made on time. Your score drops when you are late on a payment by more than a month.

Amounts owed on credit cards refers to your outstanding balance on credit cards. If your balance exceeds 50% of your credit limit, your score will be negatively affected. Statistically speaking, people who are pushing up against their credit limit are generally less likely or less able to pay back the full amount.

Your score for length of credit history is determined by how long your lines of credit have been open and whether you have maintained good standing with your lenders.

New credit inquiries affect your credit score. When a credit card company or bank checks your credit score while you are applying for a new line of credit, your score is lowered.

Variety of credit is important to credit bureaus because it enables them to better predict your likelihood of timely repayment. If you have a mortgage or student loan, for example, the payments are fixed ahead of time. Your repayment history for these types of credit may not be a good indicator of whether or not you’re likely to pay a credit card bill, which can vary widely from month to month.

How does information on my credit report affect my credit score?

Your credit score provides an easily digestible way to understand both the positive and negative elements contained in your credit report. Methods for calculating your credit score vary from agency to agency, so your Experian credit score might be a few points higher or lower than your TransUnion credit score. In general, you can raise your credit score by:

  • Paying your bills on time each month
  • Not maxing out your lines of credit
  • Utilizing less than 30% of your credit card limit each month

On the other hand, your credit score will decrease when:

  • You carry a high running balance on your credit cards
  • You perform a lot of "hard" credit checks in a short period of time
  • You file for bankruptcy
  • One of your accounts is sent to a debt collection agency

How do I know if my credit score is good or bad?

Credit scores are usually divided into three groups. Those with superprime credit scores (750+) can usually obtain favorable terms on credit. 12 million Americans have superprime credit scores. Prime credit scores are credit scores that indicate acceptable-to-good levels of risk to the lender, and usually range from 650-749. This is the largest credit score group by far, with 99 million Americans included. Subprime credit scores are 649 or less. The 61 million Americans with subprime credit scores are usually considered risky for lenders, and frequently have trouble obtaining loans. The average American’s credit score is 693, and the lower threshold for "good" credit is usually set at around 720. If your score is just a little lower than 720, don’t panic, however! All these numbers are relative, and will shift a little bit depending on the economy and other factors.

What can happen if I have a low score?

Low credit scores can have a negative impact on your life in many different ways. With a low credit score, you might not get approved for a loan to start a business, buy a car, or buy an apartment. Even if you don’t plan to buy a home anytime soon, many landlords perform credit checks on potential renters, and may deny you based on your score. If you are approved for a loan, the interest rate on the loan will be much higher.

A low credit score can not only affect your ability to get a loan, but also to earn money in the first place. Nearly half of all employers use credit checks in the hiring process, according to a 2012 survey by the Society for Human Resource Management. These days, many employers have begun using credit checks to weed out applicants even when it might not be necessary for the role. Don’t let low credit keep you from the job of your dreams!

My credit score is low, or I have no credit at all. What should I do?

The good news is that it is possible to improve your credit in a variety of different ways. Secure credit cards are a good credit-building option for many people who cannot obtain credit cards due to lack of credit or poor credit. For those who can obtain credit cards, a few simple steps will set you on the road to good credit: Open new accounts only when you need them. Pay off your balance in full and on time. If at any point you exceed 50% of your credit limit, pay it off early. Lastly, check your credit score regularly and monitor your credit reports to make sure they are up-to-date and accurate.

How long will it take to build a good credit score?

People often wonder how long it takes to improve a credit score. This often depends on the circumstances, but if you start from scratch (that is, if you are a student with no credit history at all to speak of) it usually takes between six and nine months. Unfortunately, if you have a poor credit history, it can take a few years.

Can I get a free credit score check online?

The Fair Credit Reporting Act (FCRA) requires that Experian, Equifax, and TransUnion provide one free copy of your credit report once a year upon request. To order, visit annualcreditreport.com or call 1-877-322-8228. Additionally, many organizations offer free credit reports and credit score compilations. These credit reports and compilations can sometimes be useful, but make sure to read the fine print. If the company claims to exceed the once-a-year mandated offering, it is possible that the free credit report can only be obtained with a paid monthly subscription.

Should I check my credit score more frequently than once a year?

Unfortunately, one report per year might not be sufficient, especially because the rate of identity theft has risen steadily (12.6 million cases in 2012, resulting in $10 billion in losses, according to one recent study). Moreover, the sophistication of identity thieves has increased, with many targeting thousands of victims at once. To avoid becoming a victim, you can use IdentitySmart, a service offered by PeopleSmart that helps protect your identity and offers $1 million in identity theft insurance.

If you keep a close eye on your credit score, you will be alerted of any errors that might pop up. 26% of the participants in a Federal Trade Commission study released in December 2012 found significant errors on their credit reports that had a negative impact on their credit scores. Even if your credit score is healthy now, it is advisable to monitor it regularly.

Even if you are not a victim of identity theft, and the credit bureaus do not make any errors while calculating your credit score, there are still situations in which credit alerts are helpful. For example, after a change in address, an important bill might be sent to your former address instead of your new one. You might not discover this until the bill has been in collections for months. Unfortunately, in this situation, the damage to your credit would take much time and effort to undo. However, if you receive regular credit updates, you will notice and resolve the problem much earlier.

Many credit experts believe that bureaus do not do as much as they should to investigate the accuracy of credit scores. Fortunately, there are easy and affordable ways to monitor your credit yourself! IdentitySmart offers 24/7 credit monitoring with alerts, so you will know immediately if there has been an error, if you accidentally miss a payment, or if you have been the victim of identity theft.

What kinds of errors might be present in my credit report?

According to an FTC study, the most common errors occur in tradelines or collections. ‘Tradeline’ is the industry term for an account. For instance, a tradeline error might result in a line of credit that does not belong to you appearing on your report. Your collections information could also contain inaccuracies. A bill might be listed as past due when you paid it months ago, for instance. Since your credit report is compiled from many disparate sources, there are many possible sources of errors.

What should I do if I find an error in my report?

Get a copy of your report and review it carefully. Each of the three major credit bureaus offers a way to dispute the report online.

How long does information remain on a credit report?

Missed payments and most negative public record items remain on a credit report for seven years. Chapter 7, 11, and 12 bankruptcies remain for 10 years, as do unpaid tax liens. Ongoing positive information may remain on the report indefinitely.

Should I check the credit scores of my loved ones?

Monitoring the credit score of your loved ones is a very good idea. In fact, children are often the victims of identity theft. Identity thieves specifically target children because the theft is more likely to go unnoticed for a longer period of time. Therefore, regular credit monitoring is essential for the financial safety of your family. IdentitySmart offers $1 million in identity insurance so you can make sure your child doesn’t become a victim. And if you’d like to check up on a loved one or friend, PeopleSmart can help: credit scores are available in certain PeopleSmart reports.

Will checking my credit score too often hurt it?

This is a common misconception. In fact, credit bureaus put credit inquiries into two categories: soft credit inquiries and hard credit inquiries. Soft credit inquiries, also known as soft pulls, are not related to applying for a new line of credit, and will not negatively affect your score. Checking your own credit score is considered a soft credit inquiry. Other common soft credit inquiries include job-related credit background checks and screenings for pre-approved credit cards. So do not worry: you can check your own credit as often as you like without any negative consequences.

Hard credit inquiries, or hard pulls, do affect your credit score. A hard credit inquiry is an inquiry undertaken for the sake of obtaining a new line of credit or a new type of credit service. They’re purely voluntary--when you authorize a third party to check your credit, it is usually considered a hard credit inquiry. Some common hard pulls occur when you obtain a new credit card, sign a cell phone contract, or get TV service in your home.

However, hard credit inquiries for the sake of obtaining an auto loan or a home loan receive special treatment from credit bureaus. Consumers often shop around for auto loans and mortgages (and if they don’t, they certainly should!). All credit inquiries for auto loans made within a 30-day period are usually treated as one inquiry, as with all hard pulls for mortgage approvals within a 45-day timeframe. This may vary depending on the credit bureau, so be sure to check the current rules before you apply for these loans.

Ultimately, credit inquiries only make up about 10% of your score in total, and by the time you make your first payment on a new credit card, the slight drop in your credit score is usually negated. As long as you do not apply for an excessive number of credit cards while you are in the process of buying a new car or house, your score will not be severely affected.

I read about a credit repair company online. What do they do, and are their services legitimate?

Credit repair shops mostly save you time. They can help you fill out paperwork, file disputes, and make calls to credit bureaus. However, these services sometimes overpromise and under-deliver. For example, credit repair shops are unable to remove negative (but accurate) information from your credit report. For most people, the FTC website has enough information to get started in resolving credit disputes, and the services of credit repair companies are unnecessary. Remember, the credit bureaus are federally obligated to correct any incorrect items on your credit reports. If you notify the bureaus in writing, they must investigate the allegedly incorrect items within 30 days.

Most people can handle credit report corrections on their own. However, if you have many items to dispute, or not enough time to do so, retaining the services of a credit repair shop might be a good idea. Of course, the best way to take care of your credit is by signing up for a credit alert service. That way, you will be notified of any questionable additions to your report as soon as they arise.

What is the best way to monitor my credit online?

Correcting your credit report can be a big hassle, especially if you have been a victim of identity theft. IdentitySmart, a service offered by PeopleSmart, offers consumers the ability to take control of their credit. IdentitySmart offers a credit monitoring service to ensure that you are aware of any mistakes or changes. Additionally, IdentitySmart offers up to $1 million in identity insurance. You can rest easy, knowing that your credit and identity are both safe.