Credit Report & Credit Score Basics
Here’s everything you need to know about credit reports and credit scores in 500 words. Consider it your executive briefing on the credit industry:
The major players – The three national credit bureaus – TransUnion, Equifax, and Experian – collect data on consumers from a network of reporting banks and institutions. The credit bureaus store this information and sell it to banks and other companies looking for ways to evaluate consumer risk and market credit offers. Consumers can also purchase their data from the credit bureaus. The credit reporting process is regulated by the Fair Credit Reporting Act (FCRA).
Credit reports – Credit reports are keyed off of your Social Security number and contain information about your name, address, employer, phone number, credit and loan accounts, payment records, collection accounts, and public records such as bankruptcies, liens, and judgments. Credit reports also contain a history of when your credit was checked, either for a credit application (hard inquiry) or an account review (soft inquiry). Credit reports are constantly updated with new information; most banks report new customer data every 30 days. It is voluntary for banks and creditors report to the credit bureaus.
Checking your credit – Checking your own credit data does not harm your credit score and is not considered a hard inquiry. Consumers can purchase their credit data online anytime or can request a free disclosure from each bureau every 12 months at AnnualCreditReport.com. Unfortunately, AnnualCreditReport.com does not include your free credit scores so it may not be the best option for consumers who wish to view all three credit reports and three credit scores. Consumers also have the option to purchase a retail 3-in-1 credit report which does include all 3 credit scores. Credit reports should be reviewed every 6-12 months for errors and issues. If inaccuracies are found, consumers can file a dispute with the credit bureaus to have the record investigated.
Credit scores – Credit scores are used as an algorithmic “filter” to interpret complex credit report information into a three-digit number. Banks and other institutions use this number to predict how risky a consumer is. Most credit scores use a range from 300-850 and are designed to predict how likely you are to be 90+ days late on an account in the next year. Fair Isaac Corporation creates and licenses the popular FICO score. A credit score over 750 is considered very good and will help you qualify for the best rates and deals.
Credit issues – Late payments, high credit card debt levels, too many applications for credit, and/or a credit history that is not old enough can all damage your credit standing. Records such as collection accounts, bankruptcy filings, tax liens, and judgments are also very damaging to your credit scores. Negative credit report records have a set expiration date under the FCRA, usually 7-10 years. Repayment of a record such as a collection account does not remove the record from your credit report.
Maximizing your credit – For the best credit scores: always pay your bills on time; only use under 10% of your available credit card limits each month; keep accounts open for as long as possible; and avoid unnecessary applications for new accounts. Having a mix of credit card and loan accounts is also beneficial. Credit score formulas are designed to appreciate stability, so avoid changes to your data if you already have good credit scores. You should always check your credit data at least three months before a major purchase.
There you have it! All the basic information you need to know about the credit world. For the advanced course, check out our article for Nasdaq on how to achieve the perfect 850 credit score.