Getting to Know Yourself – Know Your Credit

Discover what you really need to know about your credit score and report.

Your Credit Score — Your Credit ReportChecking Your ReportDisputing Errors

Understand Your Credit Score

Good credit starts with your credit score. It helps lenders judge your riskiness when it comes to paying back their loan. The higher your score, the more confident lenders can be that you’ll pay your loans on time.

Payoff Tip

Who Looks at Your Credit Score

  • Lenders: to approve you for a loan and set interest rates
  • Insurers: to decide what premiums to set
  • Cell Phone Carriers: to see if you qualify for a contract
  • Utility Companies: to decide if you need to leave a deposit
  • Landlords: to decide if they will rent to you

Think of your credit score as a grade point average (GPA) for lenders. With a 4.0, you look like an Einstein of credit. With a 1.0, you look a little more like the Three Stooges.

What’s Your Real Score?

You can actually have a few varying credit scores because every company calculates them a little differently. But for the sake of simplicity and because it’s the most used score, we’re going to focus on the FICO® Score.

It’s good to also know that there are three credit bureaus (Equifax, Experian and TransUnion) who collect information about your borrowing and bill-paying habits and each uses that data to create its own specific credit score for you.

Learn the 5 Pieces of Your Credit Score

There are five main behaviors that make up your FICO® credit score, the same way your GPA is calculated from all your different grades.

Payoff Tip

Debt-to-Income Ratio
Your Debt-to-Income Ratio (DTI) is the amount of debt you owe relative to your income. Lenders want to know your income to better calculate your ability to pay them back compared to all the other bills you have. Aim to keep your DTI as low as possible, but below 50% is a good starting goal.

35Payment History (35%)

Your payment history tells a lender how well you pay your bills. This includes all your bills: credit cards, loans, phone bills, etc.

15Credit History (15%)

Your credit history is a measure of how long you’ve been using credit. A history longer than three years typically results in a higher score.

10_1New Credit (10%)

Lenders are keen to know if you’ve recently opened up new credit accounts. Opening many new accounts in a short period of time might be a sign that your financial health is in critical condition.

10_2Available Credit (10%)

Your available credit is the total amount of credit that’s been extended to you. If you have two credit cards each with a $2,000 credit limit, then the amount of your available credit is $4,000.

30Utilization (30%)

Utilization measures how much of your available credit you’re currently using. The lower the better here. Having a utilization percentage under 10% is great, but less than 30% is still pretty safe.

What’s Actually on Your Credit Report and How It Affects You

The information on your credit report is generally what affects your credit score. And just like your transcript from school, it’s got all your grades, good and bad, from that A+ on your history paper to the algebra quiz you bombed because you were passing notes in class.

Payoff Tip

Common Myth: Checking Your Credit Report Lowers Your Credit Score
There are two ways lenders check your credit that you need to know the difference between:

Soft Pulls — Personal requests for credit reports that don’t affect your score.
Hard Pulls — Inquiries made by lenders who consider giving you a loan that can affect your score (try to have less than three over six months).

There are several reasons to check the information on your credit report:

  • To ensure your credit score is accurate
  • To ensure information is consistent between the three credit bureaus (it isn’t always!)
  • To determine if you’ve been the victim of identity theft!

Your Credit Report Contains a Wealth of Information About You

1. Personal Information
Your personal information includes your name, address, Social Security number, date of birth and employment history. They’re used for identification purposes so you don’t get mixed up with somebody else with the same name.
2. Credit History
Your credit history includes details on all your credit accounts — the type of account (mortgage, credit card, etc.), when it was opened, the credit limit or loan amount, the current balance and how well you pay on time.
3. Inquiries
Your credit report will also tell you how often people have inquired about your credit score. Too many inquiries may suggest you are a riskier loan.
Payoff Tip

Look for the Best Rate
When you’re looking for the best rate, or “rate shopping,” on a loan, many lenders make pulls of your credit report in a short period of time. Your credit score ignores loan inquiries made  30 days before scoring. After 30 days, all those inquiries are grouped together as one big inquiry.

4. Public Records
Public records include bankruptcies, tax liens and civil judgments. Don’t worry. We checked, appearances on Judge Judy don’t count.

Negative Information on Your Credit Report

Your credit report tells both how well you’ve used your credit and how poorly you’ve used it too. Though, anything negative will only be on your report for a set amount of time. It may not be gone tomorrow, but when negative information gets removed, your score will improve.

How Long Information Stays on Your Report

Information Type

Years on Report

Open Trades: Basically any open account (credit cards and installment loans still being paid off) For the entire time it’s open
Closed Trades: Closed accounts (canceled credit cards and paid off installment loans) without any negative payment history 10 years from closing date
Delinquency: Late payments or unpaid debts 7 years after original delinquency date
Derogatory Items: Public records and collections (bankruptcy filings, tax liens and judgments) 7 to 10 years (see other entries)
Bankruptcy – Chapter 7: When you don’t pay any of your debt 10 years from original filing date
Bankruptcy – Chapter 13: When you repay a portion of your debt 7 years from original filing date
Tax Lien: Unpaid government taxes 10 years from original filing date — Or — 7 years from date the lien was paid
Civil Judgment: Debt you owe through a court ruling 7 years from original filing date
Hard Inquiries: Checks of your credit report by potential lenders 2 years from inquiry date
Collections: Unpaid debts that are sold off to collections agencies, who take over the original loan 7 years after original delinquency date

What are Derogatory Items on Your Credit Report?

Notice several types of information listed above fall into the category of derogatory items. Derogatory items represent financial obligations you didn’t pay and are considered negative by potential lenders because they make you appear risky. If one or more derogatory items appear on your credit report it can hurt your chances of qualifying for credit, loans and other services.

Check Your Credit Report

You can get a free copy of your credit report once a year. Annualcreditreport.com is the only site where you can get a free copy of your credit report from each of the credit bureaus.

To do so, you’ll need:

  • Your name.
  • Your address (and any previous addresses if you’ve moved in the last 2 years).
  • Your Social Security number.
  • Your date of birth.

That’s it. You’ll need a web browser too, of course, but if you’re reading this you’ve clearly got that covered.

You can also get one free report if:

  • You’ve been denied credit, insurance, or employment based on your credit report (within the last 60 days).
  • You’re unemployed and plan to look for a job within 60 days.
  • You’re on welfare.
  • Your report is inaccurate because of fraud, including identity theft.

What to Look for on Your Credit Report

In short, you’re looking for anything that’s wrong. If your credit report is wrong then your credit score is wrong. So it’s important to be sure there are no mistakes on your report.

While you’re checking, make sure that all the accounts on your report are actually yours. Any you don’t recognize could be evidence of identity theft!

What to Check for Accuracy

  • Your name and date of birth
  • Your addresses and phone numbers, both current and previous
  • The listing of all your credit accounts, including installment loans, credit cards, etc.
  • The amounts of all your loans
  • Any list of negative information (hopefully none!)
  • The number of inquiries for your credit score

Dispute Mistakes on Your Report

“What if I find mistakes on my credit report?” Well, now you get to dispute the mistake by reporting it to the credit bureaus, the same way you’d tell a teacher if you found a grading mistake on an exam.

You can report disputed information online or by mail (and sometimes by phone, depending on the bureau). Online is usually the fastest and easiest, plus you can clearly view an online dispute’s status. You can use the following links to dispute mistakes at each of the credit bureaus:

For identification purposes, you’ll need to provide:

  • Your full name.
  • Your address.
  • Your Social Security number.

They’ll probably ask some additional questions, including the companies you’ve worked for, past addresses and phone numbers, or the amounts of your monthly loan payments.

It may be useful to mail the credit bureau with hard copies (copies, NOT originals) of any documents that support your dispute. You can find the bureau’s address on your credit report.

What Next?

Credit bureaus investigate disputes by contacting the company or agency that reported the bad information. Once the investigation is complete (usually within 30 days), the credit bureau must:

  • Send you the results in writing
  • Provide a free copy of your new report (if anything was changed)
  • Provide contact information for the source of the bad information
  • Send corrections to anyone who requested your credit report in the last 6 months

Getting to Know Yourself

Know Your CreditKnow Your PersonalityKnow Your Spending

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