Credit Scores, Credit Reports, & Credit Bureaus
Before lending you money, lenders want to know how big of a credit risk you are. They use a credit score to determine this.
A credit score is a single number used by lenders, insurance companies, landlords, employers and others to determine a borrower’s credit worthiness.
Various factors are considered in computing a person’s credit score, such as:
- Credit payment history
- Length of credit history
- Amounts owed
- Mix of different types of credit a person has.
Lenders send information to credit bureaus about how well borrowers manage their debt. Credit bureaus collect this information about people in the form of a credit report. Credit scores are computed based on the information in a person’s credit report.
Consumers, creditors, and lenders purchase this information about people from credit bureaus to determine how big of a credit risk they are.
There are 3 major credit bureaus:
Credit bureaus tend to weigh the various factors differently in computing a credit score, so scores oftentimes vary between credit bureaus.
Why is a Credit Score Important?
Having a great credit score can help you obtain all of the following on highly favourable terms, since you will be considered a low risk borrower:
People with good credit can easily save tens of thousands of dollars on these items over their lifetimes.
What is a Good Credit Score?
FICO scores range from 300 to 850, the higher the number the better. A low FICO score would probably be anything below 660. To qualify for the best rates, you need a score above 760. Any score above 700 is generally considered to be pretty decent.
Improving Your Credit Scores
Managing and improving a credit score generally involves 3 steps:
- Pull your FICO Scores
- Review your credit report and fix any errors
- Manage credit responsibly over time.
It takes discipline and patience to do these things, but it is well worth the effort.
1. Pull your FICO Scores
Many people have no idea what their credit score is. If you don’t know what your score is, looking it up now will help you know where you currently stand and how much work you have to do to get it to where you want it to be. Remember, the goal is to get it above 760.
You can get a credit score from a number of different sources. However, FICO scores are the credit scores used most often by lenders. If you want to know what credit scores your mortgage provider or credit card company will see when they consider your application, then you should look up your FICO scores. I like knowing my exact score, since a score of 690 versus a score of 705 could cost you thousands of dollars in interest.
There is a small fee charged for FICO scores, so don’t pull it too often. I don’t think it is necessary to check FICO scores more than maybe once a year or so. I’d also check it about 6 months before taking out a loan so you can monitor your score and take steps to improve it if necessary.
2. Review your credit report
Request a copy of yourcredit reportfrom each of the 3 major credit bureaus at AnnualCreditReport.com and check them for accuracy. Mistakes may appear on one or more reports.
If you find any errors, file a dispute with the reporting agency and the credit bureau to get them fixed as soon as possible. Provide a detailed explanation of the problem and enclose a copy of the credit report with the incorrect information marked.
Continue to monitor your credit report. Since there are 3 credit bureaus, and you can obtain a free copy of your credit report from each bureau once a year, pull up a different credit report every 4 months. See what things are hurting your credit and then make a plan to fix them.
Most people can monitor their credit just fine with a little bit of effort and diligence. However, there are inexpensive credit and identity theft monitoring services available, such as TrustedID, which will monitor your credit for you and notify you of any suspicious activity.
3. Manage Credit Responsibly Over Time
The best way to improve your credit score is to manage it responsibly over long periods of time. There are no quick fixes or short cuts. Here are a few suggestions:
- Make all credit and bill payments on time. Strive to pay off everything in full each month, but at least make the minimum payments.
- Reduce your debt. If appropriate, create an appropriate debt repayment plan.
- Keep your credit utilization ratio low.
- Don’t open up a lot of new accounts too quickly.
- Be very careful about opening up new credit cards that you don’t need or closing unused credit cards.
- In general, having a few credit cards and using them responsibly will help your credit score. You don’t need to carry a balance to build credit.
- If you don’t qualify for a regular credit card, consider obtaining a secured credit card.
- Create a budget so you know what you can afford.
- Don’t fall for credit-repair scams.
- Prevent identity theft, which can hurt your credit.
- Immediately notify your credit card company if your card has been lost, stolen, or unauthorized activity has occurred.
Final Thoughts on Credit
- Both spouses should establish credit. If something happens to your spouse, you want to make sure that he or she can still obtain favourable credit if needed.
- Once your children get into high school or college, consider helping them obtain a student credit card so they can begin to establish credit.
- Teach your children about managing credit responsibly.
For additional credit insights, consider reading the following book:
What are your thoughts on credit? What are you doing to improve your credit score? Leave a comment below!