Monday Money Sense- Credit Scores

This week we are talking about the always confusing credit score. Confusing because a lot of people do not understand it, but I'm here to help with that.

What is a credit score?
 A credit score is a number used to determine your credit worthiness. It ranges from 300-850, with 300 being bad and 850 is good. Most Americans are around around the 720's. Each credit bureau has a credit score, so each person has three credit scores.

How is a credit score determined?
This is a fun one! The actual formula isn't readily known, but there is some general information on how the score is determined.

35%- Payment History- Paying Bills on time raises your score, late payments lower your score.

30%- Credit Utilization- What is your debt to credit ratio? The closer you are to your credit limit the lower your score, the farther from the credit limit the higher the score.

15%- Length of Credit History- The longer your accounts are open, the higher score. The shorter they've been open, the lower the score.

10%- Types of Credit Used- Revolving, installment, mortgage, etc. You benefit from showing responsible usage in multiple areas.

10%- Credit Inquiries- How many times has your credit been pulled to offer you credit? Too many and your score goes down, so don't go signing up for every credit offer you get.

How do I improve my credit score?

It takes time. If it is incorrect information, work to get it removed. If it is correct however, it will take a length of time for your score to go back up. For example, late payments become less of a negative the farther in the past they are. If it's your debt to credit ratio, pay down your debt! People with excellent credit scores, often have been using their credit correctly for many years.

Why should I care what my credit score is?

Although it's possible to do things with bad or no credit, life is easier with good credit. Good credit means good interest rates, good insurance rates, and sometimes if you can have a job. Unfortunately, many companies use your credit score as a means to determine the kind of person you are. Equally unfortunate is that a credit score actually is not a great way to determine who you are. Confusing? The reality is sometimes people with good credit can end up in bankruptcy/foreclosure and people with bad credit can pay every bill on time and just had a series of bad luck several years ago. Credit scores are not an exact science.

How do I get my credit score, and when should I get it?

Most of the credit bureaus will tell you how to get your score when you get your report. It typically costs around $10. You'll also get it if your score has been pulled for a loan. If you have never seen your credit score, it may be wise to get it now, so you know where you stand. If your planning on obtaining a mortgage, car loan, or other types of loans, you probably would like to know in advance. The reason for this is so you can research what interest rate you should be entitled to. It will also keep you from having any surprises, like being denied because of your credit score.

I finally just paid off one of my cards, should I close it?

I put this one on here because a lot of people ask this question. The answer is generally no. The reason is simple it affects your score in two ways. The first is you credit length because it changes the average length of time your accounts have been open. This is usually the only thing people think about when making the decision, and they usually rationalize that it is only 15%.  But closing an account also affects your debt to credit ratio. Closing a card closes the credit limit on the card, so then any debt you have is now closer to your credit limit. This accounts for 30% of your credit! When you add it to the other you get 45%, that's practically half of what your score is made of.

Now here's the thing usually the intention behind this is to keep yourself from getting into it again, and so it's easy to see why someone would want to do that. By keeping the card open with a zero balance, your score will receive a boost because you have now bettered your debt to credit ratio. Don't close the card if it can at all be avoided.

I hope credit scores became a little less mysterious for you. Join me next week for more money sense!

Monday Money Sense- Credit Reports

How many credit reports are there?
In the U.S. there are three: Experian, Transunion, and Equifax

What is in a credit report?

• Personal Identification Information- This section includes your name, current address, previous address(es), social security, employment, and other names you might have had.
• Credit Account Information- This section includes all credit accounts (open and closed). It shows the payment history, date opened, credit limit, current balance, and high balance(what is the highest the balance has been). It also includes a pay status which is whether the account is in good standing or not. Each account will also show a type of account. The type can be revolving or installment, as well as individual or joint.
• Public Records- This will be records of public action, such as bankruptcies and foreclosures.
• Negative Accounts- This is going to be accounts like collection accounts. Collection accounts can be for anything not just credit accounts. It can be a medical bill, library fine, or anything that you owe money for.
• Promotional Inquiries- These are people/businesses who have pulled your credit report for promotional items. This might also be inquiries from if you pulled it from a free credit report site. These inquiries can only be seen by you and they do not affect your score.
• Account Review Inquiries- These are businesses that have pulled your credit for an account review or business transaction. These again are only seen by you and do not affect your credit score. This may be your credit card pulling your credit to change your terms.
• Inquiries- These are inquiries used to establish your credit. These are often inquiries for mortgages, loans, credit cards, and occasionally land lords and insurance. These can be seen by others and do affect your credit.

How often should I check my credit report?

At least once of year. Many people have mistakes on their credit report, and the only way to check them is to check your credit report at least once a year. It takes time to fix mistakes, so you want to catch them well before you try to get a loan. You are entitled to a free credit report from each company annually. You can get it HERE. If you have never checked your credit report, it would be wise to check them all at once. If you have checked your credit report before, you may want to spread out your free ones across the year.

What if I find an error?

Many of the companies have this information on their website, and many you can do online. When you receive your credit report, there should be information on how to start a dispute/investigation. When you start a dispute or investigation, you may need proof of what ever you are claiming (this is especially true for information such as addresses, names, and personal information). For accounts that have errors they will contact the company and ask them to verify the information on the report. It can be very long and annoying process. Once the investigation is complete, the company will send you a notice of it's completion and you will receive a new credit report. 

What if the dispute comes back and says the information is right, but I know it is wrong?

I definitely understand this one. I once checked my credit report to find two collections on it. Both were from medical accounts that I had no idea I owed money on. They were both due to billing/insurance issues (and ironically neither medical office ever sent me a bill). These took some work on my part of calling the medical offices and the insurance companies. In the end they told me they would remove it from my credit report, but I filed another dispute stating that with the credit bureaus, just in case. Disputes can be very annoying, but stand strong. You should also keep copies of everything concerning your dispute, and make sure that it stays removed.

Hopefully that makes things a little clearer, but feel free to ask any questions! Next week we will look at credit scores.

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Monday Money Sense- Intro to Credit Reports and Credit Scores

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What is a credit report?

A credit report is essentially a history of your use of money. It will include all credit cards, mortgages, student loans, car loans, and any other credit you may receive. It will include your payment history, balances, high balances, and length the account has been open. Your credit report will also include personal information such as addresses, employers, phone numbers, and names, as well as your social security number. It will also include any inquiries of your credit. And finally it also includes any negative information about you such as bankruptcies, foreclosures, collection accounts, etc. 

What is a credit score?

A credit score is essentially a grade on how well you use credit. It ranges from 300-850, with 300 being a bad credit score and an 850 being a good credit score. It can be used to give a brief snapshot into your personal credit worthiness.

Why do I want good credit?

Because credit is used to determine many things in your life, whether we want it to or not. The foremost is credit and loan decisions. While it is sometimes possible to get these things without good credit, it can sometimes come at an expensive and/or time consuming cost. Your credit score/report can also be used to obtain insurance, housing (landlords may do a credit check to make sure you will pay the rent), jobs (some employers believe a person with a bad credit score is more likely to try to steal from the company or will be unable to handle company resources effectively), or even to obtain a cell phone. Good credit also means better interest rates when you need credit.

Join me next week as we learn more about credit reports.