A negative credit history can have serious repercussions. Lenders may refuse to extend credit, but a bad credit report can also cause landlords to deny potential tenants and employers to reject applicants. The credit score can also be used to determine the interest rate charged on credit cards, auto loans and mortgages. Insurance companies can use a credit history to decide the rate to charge as well as whether to issue a policy at all. Consumers are discovering that it is increasingly important to protect their credit histories and repair their credit reports whenever possible. The following steps can help anyone who needs to repair his or her credit as well as those who want to protect their credit histories.
Credit Reports Explained
There’s something mysterious about credit reports, credit scores and the way that this information is provided to consumers. No one knows exactly how credit scores are calculated because agencies use secret formulas. However, you can tell a lot about how banks and creditors see you by looking at your credit report.
Request a Free Credit Report
By law, the three credit bureaus, Equifax, Experian and TransUnion, are required to give you a free copy of your report each year. You don’t have to get them all at once. If you want to track your progress, request one report every few months. You can complete your request online at AnnualCreditReport.com. This is the only official site authorized by all three credit bureaus.
How to Read Your Credit Report
When you get your credit report, the first thing you’ll see is your name, Social Security number, known addresses and personal information. Then, you’ll notice public records regarding collections, delinquencies, bankruptcies and court-issued judgments if there are any. Finally, it will give you a breakdown of your credit history. The tradelines will show all of your current and past credit cards and loans. Each item will have its own section that includes your credit limit, payment history, age of the account and other details.
You should recognize each item on your credit report. If you notice incorrect information or unfamiliar accounts, file a dispute with the bureau that issued the report. This will ensure that companies are using accurate information when they make credit decisions.
Ways to Improve Your Credit Report
1. Making your payments on time is the single best way to build good credit. You’ll also avoid eye-popping late-fees and interest rate hikes.
2. Maxed-out credit cards can decrease your credit score. If you can, keep your balances below 30 percent of your total limit.
3. The length of your credit history is another indicator that companies use to assess your credit worthiness. You can’t fast-forward years ahead, but you can establish a good record by making your payments on time and keeping old accounts open even if you don’t use them often.
4. The amount of new credit that you have and the types of credit that you use both account for 10 percent of your credit score. Applying for too much new credit can hurt your credit score because it tells creditors that you aren’t stable and might not have enough cash to pay your balances. If you have a good mix of credit, including revolving charge cards and a car loan or mortgage, your score may increase slightly.
Checking your credit reports and sticking to a good payment schedule has many benefits. You might be able to move into a nicer apartment or land a great job. You will also save money by getting better interest rates and lower insurance premiums.
Obtain Copies of Credit Reports
By law, the three primary credit bureaus (Experian, TransUnion and Equifax) are required to provide a free copy of a consumer’s credit report annually upon request. They are also required to furnish a free credit report if their report is the basis for an adverse action, such as the denial of credit, housing or employment. Under certain conditions, the bureau may also be required to furnish another credit report even if the individual has already obtained a free copy that year. Those who receive welfare benefits, are unemployed and planning to look for employment within 60 days, have been the victim of identity theft or have had inaccuracies corrected typically qualify for a second report at no charge.
Consumers can request their annual reports by calling 1-877-322-8228 or visiting www.annualcreditreport.com. Reports from all three bureaus can be requested at one time, or consumers can stagger their requests to obtain a free copy from one bureau at a time, allowing them to check their credit every few months. Because each bureau can receive information from different sources, it is best to obtain copies from each, whether requested all at once or individually.
Review Credit Reports Carefully
Studies have shown that inaccuracies exist on between two and five percent of all credit reports. Perhaps a bill was reported by the creditor as unpaid when it was actually paid, or a late payment was reported when the bill was paid on time. The consumer may have also been the victim of fraudulent activities or identity theft. It is critical to identify any entries that are not accurate and legitimate.
Report Inaccuracies Immediately
There is no legal method of removing legitimate, accurate entries on a credit report. However, credit bureaus are required to investigate reports from consumers that inaccuracies exist or that entries are the result of fraudulent activity. Requests should be made in writing and include any supporting documentation disproving the charge, such as a copy of a cancelled check showing that the creditor received payment. Some people include a copy of their credit report with a circle around the questionable entries. Under most circumstances, the bureau must investigate and respond within 60 days.
Use Credit Judiciously
Negative entries can remain on a credit report for up to seven years, and bankruptcies can remain for 10 years. The best way to protect a credit history is to pay all bills on time. However, creditors may also look for other indications that an applicant might pose a potential risk. Creditors will also look at the balances on credit cards, the approved limit on each card and how long the individual has had each card. Applying for too many credit cards or loans in a brief period can also trigger red flags for a creditor.
What Factors Determine a Credit Score
A credit report is the key factor that any lender, including credit card companies, mortgage brokers, car dealers and banks, will examine to determine whether to extend credit to a potential borrower. Credit reports are also used by landlords, insurance companies and potential employers.
Essential to the credit report are the five key elements that make up one’s credit score. Lenders analyze all factors and then look at the credit score to gauge the risk involved with lending money. These factors are the borrower’s payment history, amounts the borrower owes currently, length of credit history, new credit and the types of credit the borrower is using at the time.
The largest of the five factors, the borrower’s payment history accounts for 35 percent of the credit score. This is a look at all debt a borrower has ever held and how well they managed that debt. Crucial to this history is whether bills were paid on time. Paying bills late negatively affects credit score. The next question is how late the bill was paid. The longer the bill went unpaid, the more severe the credit score penalty. The creditor will also check if any accounts have been referred to collections, or if there have been any settlements or bankruptcies. All these factors will lower the credit score.
The second largest factor, accounting for 30 percent of the credit score, is the total amount currently owed. Of a borrower’s available credit, how much is already being used, both individually per account and in total. Borrowers must strike a balance in this category to achieve a good score. They must have some debt, as it proves they are able to manage their financial obligations, but they shouldn’t have so much debt that extending another line of credit would look like a bad idea.
At third, length of credit history represents 15 percent of a credit score. This doesn’t just mean how long the borrower has been taking out credit. It also factors the ages of individual accounts. While it may seem a long history would be advantageous, borrowers with a short history of on-time payments to accounts that aren’t over-extended will do fine.
Next, at 10 percent, is new credit. Like the name says, this facet of the overall score analyzes how many accounts a borrower has opened recently. Lenders assume that borrowers with many new lines of credit are having issues with cash flow and are using credit to cover their shortfalls. This is obviously the mark of a distressed borrower and banks are wary of anything that points to an inability to pay a prospective loan.
The final 10 percent is represented by the types of credit a borrower has open. Lenders like to see a diverse credit portfolio, including auto loans, credit cards, mortgages and credit cards. Also known as “credit mix,” this factor indicates that a borrower can handle different kinds of credit and, statistically, these types of borrowers are less risky.
A credit history has become an important aspect of everyday life, whether the goal is to rent an apartment or purchase automobile insurance. Every consumer should be proactive in protecting his or her credit.