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Credit reports & scores explained
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Before we get started – at the end of my last article I promised to explain why closing credit card accounts when you pay off the balance can lower your credit score. One part of the credit score calculation is the percentage of available credit you are using. The bigger the percentage, the more it affects your score – downward. When you close a credit card account, you are reducing the amount of available credit, thus raising the percentage of available credit you are using. So, pay off the card, and DON’T USE IT, but leave the account open.
Now, on with the show.
Everyone knows they have a credit score, a score which is used to determine whether they get loans and other items, such as credit cards and to determine the interest rates they will be charged. The three credit agencies, Experian, Equifax and TransUnion do not do a good job of explaining what goes into a credit score and how it can change, so this article will try to explain how it all works. Chances are that this will raise more questions than it answers, so if you want more information, look at the bottom of this article for internet links to the three agencies, where you can get information that may confuse you as much as it did me.
What is in a Credit Report?
Credit Reports contain the following information:
· Personal Information – compiled from credit applications you have filled out, this includes your name, current and former addresses, Social Security number, date of birth, and current and former employers.
· Credit History – details about credit accounts opened in your name or that list you as an authorized user. Account details (supplied by creditors) include account opening date, credit limit or amount of loan, the payment terms, the balance, and a payment history (whether you've paid the account on time). Closed or inactive accounts, depending on the manner in which they were paid, stay on your report for 7 to 11 years from the date of their last activity.
· Inquiries - Credit reporting agencies record an inquiry whenever your credit report is shown to another party, such as a lender, service provider, landlord, or insurer. Inquiries remain on your credit report for up to two years.
· Public Records - Matters of public record obtained from government sources, including liens, bankruptcies, and overdue child support, may appear on your credit report. Most public record information stays on your credit report for 7 years.
What is Not Included?
A credit report does not include information about your income, checking or savings accounts, bankruptcies that are more than 10 years old, charged-off or debts placed for collection that are more than seven years old, gender, ethnicity, religion, political affiliation, medical history, or criminal records. Your credit score is generated by information on your credit report, but is not part of the report itself
What is A Credit Score?
A credit score is a rating used by a lender to help determine whether you qualify for a particular credit card, loan, or service. Based on information in your credit file, the credit reporting company analyzes your information using a complex mathematical model to yield your credit score.
Most credit scores estimate the risk a company incurs by lending you money or providing you with a service -- specifically, the likelihood that you'll fail to make payments in the next two to three years. The higher the score, the less risk you represent. Your score is calculated by a mathematical equation that evaluates many types of information found in the credit file.
What Factors Affect Your Score?
The following item are used to determine your credit score. Exactly how each is used and how changes in any of these factors can change your score and closely held secrets by the companies that do the calculations.
· Payment History - A record of late payments on your current and past credit accounts will lower your score.
· Public Records - Matters of public record such as bankruptcies, judgments, and collection items may lower your score.
· Amount Owed - Owing too much will lower your score, especially if you're approaching your total credit limit.
· Length of Credit History - In general, a longer credit history is better.
· New Accounts - Opening multiple new accounts in a short period of time may lower your score.
· Inquiries - Whenever someone else gets your credit report, a lender, landlord, or insurer, for example, an inquiry is recorded on your credit report. A large number of recent inquiries may lower your score.
· Accounts in Use - The presence of too many open accounts can lower your score, whether you're using the accounts or not.
· Amount of Credit Used – The more of your available credit you are using, the lower your score.
You are now allowed to get one FREE copy of your credit report every year (it’s the law!). Get one and check it for errors and inaccuracies – your score may be adversely affected by errors in your report.
Here are three credit reporting agencies their Internet addresses, and toll free phone numbers:
Equifax– www.equifax.com , 800-685-1111
Experian – www.experian.com , 888-397-3742
TransUnion – www.transunion.com . 800-916-8800
This credit report & score stuff is so exciting that I will be writing more about it in my next article. Oh, I realize most of you find this boring, or you will until an error in your credit report jumps up and bites you when you next go to buy a car or a house or another large purchase for which you need credit.
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