Three little numbers can have a major impact on your life. Your credit score influences your ability to purchase a vehicle, buy or rent a home,qualify for a personal loan, get a job, obtain a credit card or cell phone, and may even affect your insurance rates.
“One landmark study found that credit-based insurance scores are used by about 95 percent of all auto and home insurers in calculating the cost of insurance to individuals.”
- Predictive Analytics: Achieving Greater Decision Accuracy, Better Risk Segmentation, and Greater Profitability, Fair Isaac Corporation, 2012.
CREDIT REPORTING:
A credit score is a numerical representation of a person’s creditworthiness, based on information from credit reporting agencies. This three-digit score can be purchased by lenders, employers, and insurance companies to access potential risk prior to issuing a loan, line of credit, job offer, etc. Lending organizations base loan terms and interest rates on an applicant’s credit score and financial history, obtained from his or her credit report.
There are three main credit reporting agencies: Equifax, Experian and TransUnion. These for-profit agencies are independent of one another and use different methods for calculating credit scores.
Five key factors used to generate credit scores include: payment history, longevity of credit, current credit utilization, number of recent credit inquiries, and credit mix. Scores do not include personal information such as, income, current job status, and savings.
“The average national FICO Score reached the 700 threshold — some 10 points above what it was just prior to the recession in October 2006.”
- Fair Isaac Corporation (FICO)
How does your score compare to the national average?
REQUEST YOUR CREDIT REPORT:
You are entitled to receive a free copy of your personal credit report from each of the three consumer reporting companies every twelve months. You can get them all at once, or choose to stagger your reports throughout the year. The three reporting agencies are not affiliated, so you will find different information within each report.
Get your free credit report at www.annualcreditreport.com, or call 1-877-322-8228.
CONSIDERING A LARGE PURCHASE?
If you’re planning to purchase a home or automobile, pull all three credit reports a few months prior to submitting loan applications. Give yourself ample time to resolve any possible errors. Generally speaking, those with higher credit scores receive better loan terms, so it’s worth your effort to confirm accuracy.
“Having a top-tier credit score can save you tens of thousands of dollars in interest, so make good credit behavior a priority for you.”
- The Motley Fool
MONITOR REGULARLY:
If you aren’t in the market for a large purchase, continue to monitor your credit reports throughout the year. Set quarterly reminders, and request your report from a different agency every four months. Screening for unauthorized access may help you uncover fraudulent activity and prevent undue damage to your credit.
“Nineteen people fall victim to identity theft every minute.”
- TransUnion
CREDIT SCORES:
Annual credit reports do not include consumer credit scores. You may request your credit score from your lending organization. Or, purchase it from a credit reporting agency. Beware of sites offering “free” credit scores, as they often have hidden fees.
“There’s no quick fix for creditworthiness. You can improve your credit report legitimately, but it takes time, a conscious effort, and sticking to a personal debt repayment plan.”
- Consumer Financial Protection Bureau
Pay your bills on time, every time. Set up auto drafts. If you forget to pay a bill, call your lender. If you have been a good customer, your creditor may remove your late fee and withhold the delinquency from the credit bureau.
Maintain low balances on revolving credit. Pay off credit cards at the end of each payment period. Utilize no more than 30 percent of your credit limit. Consolidate multiple cards with low balances into one loan. Do not close credit card accounts, because it may affect your debt-to-credit ratio.
Show responsible repayment over time. Retain loans or credit cards with a good track record on your credit report. Displaying a long history of responsible money management helps prove your creditworthiness and can improve your credit score.
Keep new credit activity to a minimum. Submitting multiple credit inquiries or applications in a short timeframe can raise a red flag with credit bureaus, and may negatively affect your score.
Check each section of your credit report for accuracy. Errors are more common than you might think, and may include issues due to identity theft, outdated or incomplete information, incorrect payment status, and data from an ex-spouse.
Dispute errors online or by mail. If errors are present on multiple reports, you’ll need to dispute them separately. Provide an explanation and supporting documents. Keep copies of all your correspondence. Follow up to ensure your errors are resolved in a timely manner. Continue to monitor consistently.
“Four out of five consumers who filed disputes experienced some modification to their credit report. Slightly more than one in 10 consumers saw a change in their credit score after the CRAs modified errors on their credit report.”
- Federal Trade Commission
BUILD GOOD CREDIT:
In order to have a credit score, one must have at least one account that has been open for six months or longer. Plus, activity must be reported by at least one creditor within the last six months. Keep this in mind with young adult children.
To build credit, open a store credit card from a favorite retailer. Pay it off immediately. Obtain a small personal loan, and secure it with collateral. Ask your landlord and utility companies to submit responsible payment history on your behalf.
"Approximately 14% of the population has no credit score whatsoever, and is labeled as credit invisible. As a result, these under-banked individuals will have difficulty obtaining new lines of credit."
- Value Penguin, as reported by the Consumer Financial Protection Bureau
START EARLY:
Encourage children and grandchildren to develop good credit in adolescence. A large portion of a credit score is based on account age and payment history. Building credit early on may open up opportunities to borrow money and build a better future.
BUSINESS LOANS:
If you’re a small business owner, or would like to be one day, keep your personal credit report in good standing. Lending organizations check the personal credit reports of business owners prior to issuing small business loans and lines of credit.
Be mindful of the impact business credit cards and other loans can have on your personal credit. It’s nearly impossible to eliminate your personal liability with small business credit cards, but there are other ways to minimize your risk. Talk to a professional advisor before applying for business credit to make sure you’re fully covered.
BOTTOM LINE:
Information in your credit report affects major aspects of your life. Bad credit can cost you more than just money. Your credit history and credit score influence your ability to purchase an automobile, obtain a home loan, rent an apartment, and so much more.
Establish good credit from a young age. Check your credit reports regularly. Quickly dispute any errors. Take necessary steps to improve your credit score.
Have questions, or need help deciphering your credit report? Pick up the phone or send us an email. We’re only a phone call away.
CREDIT BUREAU CONTACTS:
Experian-1-888-397-3742
www.experian.com
TransUnion-1-800-916-8800
www.transunion.com
Equifax-1-800-685-1111
www.equifax.com