What’s my Credit Score?

According to a recent report by Smartcredit.com, only 4% of people access their free credit each year. The government originally started requiring the three major credit bureaus—Equifax, Transunion, and Experian—to provide a free annual report every year to encourage credit education, reduce fraud and identity theft among consumers. Given the 4% utilization rate, it appears the effort may not be working according to plan. However, credit monitoring is big business as more and more players are entering the market for your financial management dollars. Here are five things to consider regarding personal credit management and your free report:

1. Annualcreditreport.com is the ONLY government sponsored site that offers a free annual report from each of the three credit bureaus. There are countless copycats and plenty of other legitimate providers, but make sure you know what kind of site you’re visiting before you invest money with a credit monitoring service.

2. This site (annualcreditreport.com) allows users to choose the method and timing of report orders. The reports can be ordered at the same time or staggered over the course of the year: user option. Also, the credit history report is free, BUT it does cost to get a FICO score as part of the order.

3. Once you order a report from one of the bureaus, it’s not free again for a full year.

4. Since the report is designed to promote awareness, it makes sense to use the report to familiarize yourself with the content of your report. If there are errors or fraudulent information on your history, there are ways to dispute the information and get the report corrected. It’s important to dispute the information immediately so when good credit matters—loan, insurance, and job application to name a few—your record will be correct and accurately reflect your history.

5. As identity theft and security breaches of personal information become more common, it is essential to protect identity and monitor fraudulent activity. All three of the main bureaus, and many other quality credit monitoring providers, offer ongoing protection in various forms. It would be very wise to use annualcreditreport.com as an introduction to your credit, and then find a service to help you monitor your credit and personal information moving forward. It is much easier to plan ahead and purchase protection than it is to try to pick up the pieces after you’ve been victimized by identity theft.

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Credit 101: The Rest of the Story…

On June 23, I posted the first half of an entry on personal credit and credit scores.  Here is the second half of that entry.

 

Never take your personal credit for granted.  Even if you pay your bills on time or don’t borrow money, it is in your best interest to keep track of your credit report to make sure you don’t get surprised by identity thieves or by incorrectly reported information.  The sooner you identify issues, the sooner they can be fixed.

Only hard inquiries affect your credit score.  There are two types of inquiries of your credit report.  Hard inquiries are credit searches completed when you apply for a loan.  Soft inquiries include things like pre-screened offers by credit card companies and inquiries by you, the consumer.  In other words, monitoring your own credit will not hurt your credit score.

Payments on a home or business loan can be significantly affected by your credit score.  For example, First National Bank of Pandora offers a 30 year fixed rate home loan.  The best posted rate today was 4.625%.  Depending on your personal credit score and several other factors, the rate may be higher than this best rate.  For the sake of comparison, imagine a $100,000 loan for 30 years at 4.625% and an identical loan at 6.00%.  Over 30 years you could save approximately $30,748 if your credit score justifies the lower rate. 

Quantity in your credit history is not as important as quality.  You do not need to have a lot of credit to build a good credit score.  Managing the credit you have—regardless of quantity—will eventually lead to good credit.

Research your options before you commit to a banking product or service.  Advertised rates and promotions at financial institutions often target customers with the highest credit scores.  If your credit score needs improvement, make sure you are getting a rate and terms you can live with.  This is where knowing and trusting your banker makes all the difference.  If you know who you’re dealing with and can trust him or her, you should be able to count on getting a quality product at a competitive and fair price.

Stay away from unfamiliar companies that over promise and advertise deals that are too good to be true.  Just like many other industries, if a deal sounds too good to be true, it probably is.

Time heals all wounds.  Even though information may remain on your credit report for a significant period of time (up to 7-10 years depending on the type of account), negative information will not permanently hurt your credit score.  The more time that passes from a negative event or late payment, the smaller the impact on your credit score.  Even a bankruptcy or a tax lien will disappear after a certain number of years.  The key is to keeping making progress and avoid repeating mistakes made in the past.

Understand that banks are not the only companies that use credit scores and your credit history to evaluate you.  Insurance companies use an insurance bureau score based on information found in your credit report to help them determine your risk as an insured.  Many employers also use credit reports and credit data to identify red flags for potential employees.

Verify that the debts you do have are showing up on your credit report.  There are companies that make loans that do not report to the credit bureaus.  In this case, even if you borrow money and make payments on time you will not get credit for it.  If you’re trying to build or rebuild your credit, make sure your credit report is accurately reflecting the progress you’re making.

Watch your due dates.  Late payments will not show up on your credit report until your account is 30 days past due.  However, if you are past due at all, a creditor may charge a late fee, increase your rate, or assess some other sort of penalty.  Make sure you understand the terms of each of your debts.

eXpect (sorry, this was the best I could do) to make loan payments if you co-sign a loan for someone.  Banks will often lend money to borrowers who may not fit normal lending guidelines as long as a qualified co-signer also agrees to be obligated on the loan.  Not only will the bank expect you to make payments if the primary borrowers falls behind, but the late payments will also show up on your credit report as a missed payment by you.

Young people should start to think about credit before they need to use it.  It is never too early to start learning about credit.  If young people understand the ins and outs of credit before they need a loan, it will be much easier to make smart decisions and build good credit once a loan becomes necessary.

Zeroes on a credit report are almost always a positive sign.  It either means you have paid a loan off or you have a $0 balance on a credit card or line of credit.  In any case, aiming for Zero is not a bad strategy in the world of managing your credit and improving your credit score.

Hopefully, these two entries on credit have been informative and at least a little entertaining.  Feel free to respond or comment with any questions you may have. 

 

Credit 101: Where to Start?

When I try to sit back and see banking from the perspective of someone who doesn’t spend every day “thinking” banking, there are very few things that seem more confusing than credit reports and credit scores.  Reading a credit report is something I do almost every day and there are still times when I’m left scratching my head.

Since I do quite a bit of reading on this topic and still have trouble finding definitive and helpful answers in one place, I’ve attempted to collect and organize them in a way that is truly informative and useful.  So, from A-Z, your alphabetized list of credit answers:

A credit score is what, exactly:  a credit score is a snapshot of your credit health and is an indication of how you manage your debt.

Basic histories of all of your debts and payments are contained within a credit report.

Credit Bureaus are the companies that gather, organize, and publish your personal credit data.  There are three main credit bureaus: Equifax, Transunion, and Experian.

Data is automatically transmitted by banks, finance companies, and other lenders to one or all of the three bureaus.  The three bureaus take the data and analyze it to create your credit history and credit score.

Every person does not have a credit score.  Credit scores measure how you handle your debt and payments, so if you do not have personal debt—i.e. credit card, car loan, home mortgage, student loans, etc.—you will not have a credit score.

FICO scores are credit bureau risk scores produced from models developed by Fair Isaac Corporation, the most well known scoring model.  Most lenders use a FICO based score when evaluating your requests for credit.

Good credit is a subjective and a moving target, but it usually means a credit score somewhere at or above 700.  Credit scores (based on the FICO model) range from 300-850 but 60% of consumers’ scores fit within a range from 650-799, according to myFICO.com.

How many different factors help determine a credit score, and how important are they?  The graph below shows the five main categories and their respective importance to your score.

(courtesy of myFICO.com)

Is there one quick way to improve a credit score?  Actually no, but there lots of little things you can do to improve your credit over time including paying your bills on time, keeping balances low on credit cards, resisting the urge to open new accounts just to accumulate available credit, and many more.  See here for a more comprehensive list of ideas.

Judgments, bankruptcies, collections, and tax liens all show up on credit reports and can have lasting effects on a credit score.  Even after they are paid in full or discharged, these types of occurrences may stay on a credit report for 7-10 years.

Keep a close watch on where you get your credit report and score.  There are countless companies out there advertising their “credit scores”, but they may not be using a FICO score and they may not be accurately portraying your true credit health.  Even more importantly, watch out for unscrupulous companies who are just looking to gather your personal financial information for their own purposes.  See letter ‘M’ below for a reputable resource and see the helpful table below for the name each reputable credit bureau gives to their FICO score.

Credit Reporting Agency	FICO Score
Equifax	BEACON® Score
Experian	Experian/Fair Isaac Risk Model
TransUnion	EMPIRICA®

 Lenders use credit scores and reports as part of the loan application process, but they are not the only factors taken into consideration.   The rest of your financial picture plays a major role in the evaluation of a request for credit.

Monitor your credit report and score by visiting annualcreditreport.com.  This site is government sponsored and is managed collectively by the three major bureaus to provide you free access to your report.  You are entitled to a free report from each bureau once every year.  Helpful tip #1: the report is free but you have to pay a nominal fee (approximately $5 apiece) to get your FICO score from each bureau.  Helpful tip #2: you can access all three reports at once or you can order each report separately at different times during the year so that you have more regular access to your credit history.

 Now you’ve made it to the midway point in my list.  Check back soon for the rest of the story.