Spring is near and with the April tax filing deadline approaching, it is a good time to do some financial spring cleaning. A good place to start is by checking your credit report and score.
If you’ve recently gone through a major life event such as buying a house, financing a business or an education, or even if you haven’t, it’s wise to look into both your report and score. The report is a snapshot of which lenders are lending you money and how much. The score uses that data to assess what kind of credit risk you are and identify that with a number between 300 at the bottom and 850 at the top.
There are three nationwide reporting companies— Experian, Equifax, and TransUnion — that provide this information. And the Fair Credit Reporting Act ensures that anyone can access the report for free once every 12 months—it’s the law!
According to the Federal Trade Commission, AnnualCreditReport.com is the only authorized on-line source for the free annual credit report, though the reports can also be ordered through the mail or by phone. Don’t be fooled by other offers you see on TV or receive by e-mail claiming to offer free reports; AnnualCreditReport.com and is the one authorized source for a truly free credit report, but, of course, you can pay for additional services.
All credit reports reveal basically the same information regardless of the reporting agency. This information is shown in your report but not factored in your score:
- Information you supply to lenders—your name, address, Social Security number, date of birth and whether or not you are employed.
- Information on your credit accounts—Lenders inform reporting agencies how many accounts you have with them, the type (e.g. credit card, auto loan, mortgage, school loan), the date you opened the account, your credit limit or loan amount, the account balance and your payment history.
- Information on credit inquires— Each time you apply for a loan or credit card, lenders ask for a copy of your credit report. This section of your credit score includes a list of everyone who viewed your credit score within the last two years. Did you know that involuntary requests to access your credit report are often made when credit card companies, for example, want to assess your credit worthiness? This is why you may receive pre-approved offers for credit cards.
- Information on collections and public records—any outstanding debt that may have gone to a collections agency, and things like bankruptcies, foreclosures, suits, wage attachments, liens and judgments are included here.
FICO scores are the most commonly used method to determine your credit risk, which is another way of saying: how worthy are you of getting credit from lender.
FICO scores are calculated based on data in your credit report such as payment history, amounts owed, length of credit history, new credit and types of credit used. It’s not necessarily how much debt you have, but what your debtor behaviors are that matter.
Do you pay on time? Do you make regular payments? If you have credit cards with revolving credit lines, how much of your available credit are you using? The closer you are to your credit limit, the more you look like a risky borrower. This can affect your credit score. If you have not been using credit for very long, the weighting of these categories may vary but in general this is a good outline of what counts in a credit score.
What’s not in your FICO score?
U.S. law prohibits the use of age, race, color, religion, national origin, sex and marital status as determinants of credit score. Some requests for your credit report do not count against, including requests for your own credit report. Although inquiries made by lenders in order to make you a pre-approved credit offer or to review your account with them show up on your report, they do not adversely affect your score. And do not worry if you have been applying for jobs and potential employers are making credit report inquiries. Those are not counted either.
What if something in my report is wrong?
If you see information on your credit report that is incorrect or that you want to dispute, contact both the credit reporting agency and the information provider. This information can impact your credit score, so make sure it is correct.
So, why does having a good credit score matter?
A high credit score sends a signal to lenders that you are a good borrower who makes regular payments and that you are likely to pay off your loan. It can help you to secure better interest rates and more favorable loan terms, especially for big things like securing a mortgage.
Scores range from a low of 300 to a top score of 850. Unless you’ve had a major negative credit event (like a mortgage default), your credit range will likely fall in the 600 to 700 range, which is considered good and above average according to the three main reporting agencies.
Armed with your credit information you can take steps to tidy up your financial life:
1. Assess which credit cards you need and which ones you don’t. Consider closing store cards that you no longer use.
2. See how much you owe and develop a budget that helps you get out of debt.
3. Take advantage of an improved credit score by asking for lower interest rates from lenders.
4. Prioritize high-interest debt. Pay it off faster with regular, bigger payments.
The bottom line?
Check your score at least once a year because it is free to do so. Know what you owe. And finally, make sure that all of the information is correct and report any errors immediately.