Understanding & Managing Your Credit Report
Borrowing money— or “credit,” in financial speak—is an essential tool in your personal financial toolkit. When managed well, credit makes it easier to achieve life’s goals. If managed poorly or neglected, your credit history can come back to bite you.
The good news is that managing your credit profile isn’t difficult or mysterious.
Why do I need credit?
Why borrow money in the first place? Isn’t it better to spend only what you have?
Yes, all things being equal, it is best to spend within your means. But our financial needs don’t always coincide with our ability to pay for them in full, particularly in young adulthood, and throughout life.
Sometimes, it makes good financial sense to borrow today for something that can significantly improve your life or your family’s, now or in the future:
- A new house (a mortgage)
- Higher education
- A safe, dependable car for commuting to work
- A loan for a start-up business
- A home improvement (often through a home equity line of credit, or HELOC)
Other times you may want to borrow short-term credit, such as a credit card. This can make life more convenient by helping you avoid having to use cash and segregating financial activity into separate accounts.
While credit may be unavoidable, it’s critical to remember that credit should only be used as long as you can afford the overall cost and make your payments on time.
What is a Credit Report?
A credit report is your credit “report card,” used by lending institutions to decide what kind of credit you’re eligible for, and at what rate. It provides a guide to lenders in predicting risk, in particular if you will pay back your creditor in full. Like your report card in school, your credit report is something you can manage and control.
Some inputs into your credit report are your credit card and retail account history (such as department store credit cards), installment loans (loans where you make regular monthly payments, like car loans) and mortgage loans. Other inputs include public record and collection items, such as delinquency payments on utility bills that are sent to collection agencies, bankruptcies, foreclosures, lawsuits, wage attachments, liens and judgements.
Lending institutions such as banks and credit card companies will extend credit to almost anyone, dependent on approval. It’s a tool that you’ll want the option of being able to use, because your credit history is central to having access to affordable credit.
How do I get a Credit Report?
Unless you’re under age 21, and even sometimes then, it’s very likely you already have a credit history. So the first step in managing your credit history is getting a copy of your credit report.
There are three primary companies in the U.S. that produce credit reports: Equifax, TransUnion, Experian
You’re entitled to a free credit report from each credit reporting agency at least once a year, and it’s recommended you do this through the Federal Trade Commission’s simple one-stop service in one of three ways:
- Submit a request online at www.annualcreditreport.com; or
- Call toll-free: 877-322-8228; or
- Complete the Annual Credit Report Request Form and mail it to:
Annual Credit Report Request Service
P. O. Box 105281 Atlanta, GA 30348-5281
At any time, you can also get a free credit report if:
- You’re denied credit, insurance, or employment based on your credit report;
- You’re unemployed and looking for work;
- You’re receiving public assistance; or,
- Your report is inaccurate because of fraud, including identity theft.
If you’re ineligible for a free annual report, you can purchase your report directly from the three reporting agencies, for up to $10.00 per copy:
Is my Credit Report accurate?
Once you have your credit report, you need to make sure it’s correct.
- Are your identification details such as name, phone numbers, addresses correct?
- Does your report include any information about another person with the same or similar name? (This is known as a “mixed file.”)
- Are there any accounts that aren’t yours, either because of a mistake or identity theft?
Incorrect account status
- Are any closed accounts shown as “open?”
- Are you shown as an account owner for accounts where you’re only an authorized user?
- Are any accounts incorrectly shown as late or delinquent?
- Are any dates of last payment, account opening, or first delinquency incorrect?
- Is the same debt listed more than once?
- Is incorrect information still showing, even after you’ve corrected it?
- Do any accounts appear several times with different creditors?
- Are all current balances correct?
- Do any accounts show an incorrect credit limit?
What if I find errors?
Contact the credit reporting agency as well as the furnisher of the information (the company or institution that provided the information). Credit reports always include instructions on disputing information. You can also use the Consumer Finance Protection Bureau’s sample dispute letters for furnishers and credit reporting agencies.
What affects my credit score? How is it determined?
The FICO score is the original credit score (started in 1958 by the Fair Isaac Company). It’s not the only way your credit report is scored, but your FICO score is still the major credit score used by credit card companies, banks, and other lending institutions. Here’s how it’s determined:
35% Your payment history
Have you made credit card and loan payments on time? Were there any late payments (delinquencies), and if so, how late were they, how much was owed, how recent were they, and how many times were you late? Older late payments and smaller late payment amounts count less than more recent, larger late payments.
30% Your credit amount
How much do you owe on each account? What’s the overall amount you owe? Do you have a very small balance with no missing payments? (That’s good!) Do you have a lot of credit accounts with balances? (That may not be so good.)
15% The length of your credit history
What’s your oldest account? The average age of all your accounts? When was the last time you used your credit account?
10% New credit
How many new credit accounts do you have? How long has it been since you opened a new account? How many requests for credit have you made in the last year? How long ago did a lender make a credit report inquiry? Have you repaired any problematic credit history?
10% Types of credit
What kinds of credit accounts do you have? Revolving credit (credit cards)? Installment credit (personal, car, student loans, mortgages)? How many of each kind?
How do I improve my Credit Score?
Every year, make your free request for all three credit reports and check your reports and your score. Repair your credit history if you have had problems.
Manage your credit responsibly. Make payments on time and, if possible, pay your balances in full each month. And open new credit accounts responsibly.
If you have no credit cards, consider opening a credit card account and maintaining small balances that you can pay off on time. Credit agencies consider having no credit cards a potential credit risk.
Don’t move debt from card to card, or borrow to pay off loans. Credit agencies are wise to this—you may actually lower your score by owing the same amount in fewer accounts.
Don’t open credit cards that you don’t need.
If you’re young or are new to using credit, don’t open a lot of new accounts at the same time. The lower your average account age, the lower your credit score if you are a new borrower.
Shop for one kind of loan at a time. Credit agencies can tell the difference between shopping for one loan and searching for many new credit lines. The latter is suspicious.
Remember, you won’t raise your score by closing credit cards.
Of course, there is a price to borrowing money. And that price can vary depending on your ability to pay, the likelihood that you will pay off your debt on time and in full, and the collateral you have to back up the debt. The best credit deals—the biggest amounts of credit at the lowest rates—typically are offered to those with the best credit history.
That could be you, if you can build and maintain a good credit history.