How to Check Your Credit Report
There are businesses that exist solely to scrutinize your credit history. Credit card companies and other lenders rely on this information, so your credit score determines your chances to borrow money — and how favorable the terms will be.
A Crash Course in Credit Scoring
There are three major credit-reporting agencies: Equifax (www.equifax.com), Experian (www.experian.com), and TransUnion (www.tuc.com). The website of each details how to get a copy of your report via mail or Internet. Be sure to order one from all three.
Until recently, credit scores’ calculations (and how to improve them) were literally a secret. Fair, Isaac & Co. is the company that blazed the credit scoring trail 40 years ago, and — under pressure from consumer groups, Congress, and lending institutions — they recently decided to provide credit scores and guidance on their website (www.myfico.com).
Credit scores can range from 200 to above 800. Scores below 620 are considered risky, but 720 and above should afford you excellent rates and terms for any kind of credit.
There are five categories used in determining a credit score:
1. Payment history (35% of total score): Late payments and amount owed are the two areas scrutinized most closely. What you may not realize is that recent late payments are more detrimental than those from years before. According to Fair, Isaac, “A 30-day late payment from last month will count more than a 90-day late payment five years ago.”
2. Amount owed (30% of total score): Large outstanding balances on your accounts do not necessarily damage your score. The significant factor is the percentage of total available credit you’re using on your credit cards. A common mistake is to consolidate many small credit card balances onto one card. This will actually cause your score to go down because your credit line on the one card will be closer to your credit limit.
3. Length of credit history (15% of total score): If you’re just starting out, you know that you need credit to get credit. There’s no way to improve this part of your score other than to wait. Logically, it makes sense for parents to establish a credit card in their child’s name just to get the ball rolling.
4. New credit (10% of total score): Applying for too much new credit in a short period of time is the most common and costly mistake most consumers make. While it counts for only 10% of your score, your score still drops when too many companies request your credit report in a short time. Note that if you request your own credit report (a “consumer-initiated inquiry”), it doesn’t count against you.
5. Types of credit (10% of total score): This category considers the overall mix of the credit you carry — installment loans, mortgages, revolving credit accounts, etc. Unfortunately, this category remains shrouded in mystery. Fair, Isaac won’t disclose how the various types of accounts are weighted.
Credit bureaus give your score to lenders along with “reason codes” which explain why your score is what it is. Examine these reason codes; they’re the keys to improving your credit score.
Deciphering the Credit Report Code
With your credit report in hand, give it a thorough review. Check these items for timeliness and accuracy:
Check that all items included in the credit report are factually correct. If there are incorrect entries, notify the credit bureau in writing. Include copies (never originals) of documents that dispute the incorrect entries. Send the whole packet by certified mail to provide proof that the credit bureau received the information. They have 30 days from receipt to adjust or verify the incorrect data.
Check that all items are actually yours. If you have a name or Social Security number similar to someone else, it’s possible that his or her information will be attributed to you. Remember that even if that person’s credit is better than yours, you still have an obligation to correct the information.
Look for inactive accounts that remain open. Close any accounts you don’t use.
Check for late payments. Those from more than seven years ago can be removed from your record at your request.
Look over the list of your accounts and verify the numbers.
Verify correct address information and Social Security number.
How to Improve Your Score
First, pay your bills on time. Reduce outstanding debt, especially high-interest credit cards. Build up your savings.
Don’t fall for schemes that help you create a new credit identity. It’s illegal, and purveyors of these schemes incorrectly tell you that they’re invisible to creditors.
There is no quick fix to improving your credit; stay the course and you will see improvement.
If you would like more help with guidance on next steps, please reach out to me either by phone or email.