Understanding the significance of the information on your credit report, how your credit score is determined, and what it all means can seem overwhelming. Let’s dive into the answers to some of the questions you are likely to have.
What’s the difference between a credit report and a credit score?
Your credit report shows the details of your credit and payment history. It shows how much debt you have, how many open accounts you have, how long you’ve been using credit, and how and when you’ve made payments. Your credit reports likely reside with one of the three national consumer credit bureaus: Experian, TransUnion, or Equifax.
By contrast, your credit score is a single number calculated from the information on your credit report. Most lenders and credit card companies use both your credit score and your credit report when deciding to offer you a loan or a credit card.
What constitutes a “good” credit score?
There are two main consumer credit scoring models – FICO and VantageScore.
A “good” FICO score ranges from 670 to 739, and a “good” VantageScore ranges from 661 to 780. Lenders are free to set their own thresholds, however, many banks consider a score of 700 and above to be good. To get the best rates and terms, you need an even higher score, in the “very good” or “exceptional” category.
Since lenders have their own criteria for what scores receive which terms, it’s important to shop around when looking for a loan or a credit card.
How is my credit score calculated?
While the credit bureaus don’t reveal the exact scoring algorithms, they use five factors to determine your score.
- Your payment history. Do you pay on time, or do you have a history of late payments? This is the most significant factor used to calculate your credit score. Percentage: 35%.
- Credit utilization. How much of your available credit are you actually using? For example, if you add up the total credit limits on all your credit cards and it equals $10,000, and you owe $4,000 across your various cards, then your utilization is considered to be 40%. The lower this percentage, the better the scoring algorithm likes it. Percentage: 30%.
- Length of your credit history. How long you’ve had credit accounts is considered in your score. Percentage: 15%.
- Variety of accounts: Credit bureaus like to see a diversity of accounts, from credit cards, to car loans, to mortgages. Percentage: 10%.
- New accounts/recent inquiries: The number of new accounts you have, combined with recent credit inquiries, can adversely affect your score. Percentage: 10%.
How often do they update my credit scores?
Your score can fluctuate by the day, or even the moment, depending upon when new information is reported.
Relevant updates can include:
- Payments recorded
- Changes to an account balance
- New credit inquires
- Increases or decreases in your overall outstanding debt
Because your credit score can change so frequently, don’t spend time worrying about minor fluctuations. Most major banks and credit card issuers will offer you access to a credit score for free – but not from all three bureaus, usually just the one with whom they have a contract to offer that free benefit.
How can I improve my credit score?
Improving your credit score takes patience. If you have late payments or collections on your credit report, they will stay on there for 7 years. Starting today to maintain a perfect payment history can offset that over time. Also, putting a pause on opening new accounts and limiting further credit inquiries can help improve your score as those accounts and inquiries age.
For short-term improvements, you can pay down credit card debt to reduce your credit utilization ratio, which will have an immediate positive effect on your score.
No one wants to see negative information on their credit report. If your credit report shows inaccurate or incomplete information, you can submit a dispute asking the credit reporting agency to investigate the information in question. Use this letter and customize it to suit your situation.
The dispute will be sent by the three credit bureaus to the furnisher (creditor) that holds the account. If the creditor determines that the account is being reported incorrectly, they will update or remove the account to correct the information.
An online dispute is the one of the biggest mistakes you can make. Many online dispute forms contain arbitration clauses, which can undercut your consumer rights. The credit bureaus bury waiver clauses in the click agreement. By clicking, “I accept,” you’re giving up the right to sue them if they do something wrong.
How do I get access to my credit scores and credit reports?
In addition to the free reports and scores made available by many financial institutions, you can request a free credit report once a year from all three credit bureaus at the following website: annualcreditreport.com.
Beware of websites that scare you into signing up for “credit monitoring” as they often come with an expensive monthly subscription. Instead, look into “credit monitoring” at your local bank or credit union as this service is often offered free of charge.
My credit report is full of errors, and I can’t get them to remove them. What do I do?
If you have disputed information you know to be inaccurate and cannot get it removed, contact an experienced attorney for help.
It’s free to chat with me about your options – you can call or text me at 215.551.7109, or drop me a line.