What Is A Credit Report and Credit Score?
With interest rates on the rise, you must ensure your credit report and credit score are accurate to get the best interest rate possible when applying for a loan. A good credit score can save you thousands of dollars on interest. So let's dive into what exactly your credit reports and score are, how to make sure they are accurate, and how to improve your credit score.
What is a credit report?
A credit report is a detailed summary of your credit history prepared by a credit bureau that lenders then use to determine your creditworthiness. There are three main credit bureaus. They are Equifax, TransUnion, and Experian. Each month when you make payments on your loans or credit cards, that information is reported to one of these agencies.
You want to check your credit report before needing a loan in case there are errors that need to be disputed. You are entitled to one free credit report each year. You can contact each bureau individually and request a copy, or you can go to www.annualcreditreport.com and request a copy from one or all three credit bureaus. Whichever route you take, you will want to go over it with a fine-tooth comb once you have it.
What errors should you be looking for on the credit report?
Unfortunately, both the credit reporting agencies and lenders can make mistakes. Here is a list of items to look for.
Incorrect personal information such as your name, date of birth, social security number, and address
Accounts that do not belong to you
Accounts that you have closed but are still showing active
Accounts that are still active but are showing closed
Late payments that were actually paid on time
Any other discrepancy
If you find any errors file a dispute. You can typically do this right from the credit report if you use the above link. The credit reporting agency has thirty days to verify your claim and resolve your dispute. If they cannot, they must remove the item from your credit report. Removing all negative items from your credit report will improve your credit score. So it is crucial to take the time and dispute all errors.
What if I have collection activity on my report?
Any collection activity on your report will lower your credit score even if it is showing paid. Ideally, you do not want collection activity on the report at all. If you have a collection showing as “paid,” call the collection agency and ask them to DELETE the collection from your record. Most will do this. This one simple phone call can significantly impact your credit score.
What is a credit score?
Your credit score is the number lenders will look at to determine how likely you are to pay back your loan based on your credit history. The number can range from 300-850. The higher the score, the better. Although the credit report may have a credit score, the actual number you want is your FICO score. The FICO score is what mortgage lenders use. You will have to pay a small fee to get the score, but you can quickly obtain it at www.myfico.com. Now that you have fixed your credit report and removed all errors let's look at other ways to improve your credit score.
Ask for higher credit limits. Using all of your available credit can lower your FICO score. Ideally, you should only hold a balance on about 30-35% of your available credit. So if you have high balances on your credit card, call the company and ask them to raise your credit limit. The key, though, is not to use the additional credit. That will defeat the whole purpose. And if you do not have good spending habits and might be tempted to buy more now that you have more credit, I DO NOT advise this. The point is to improve your credit, not go further into debt.
Pay down your balances. Again, you should only use a portion of your available credit. So paying down your balances should be a priority. To do that, you need to be spending consciously, not buying unnecessary things. This way, you will have more money to pay off your debt by paying more than the minimum payment.
Pay your bills on time. This should be common sense, but it's all too easy to pay a bill late. If you are determined to improve your credit score, set up automatic bill pay so that you never have to worry about a late payment again. Most credit cards will also send you push notifications to remind you to pay when your balance is due. I'm not a fan of push notifications, but it is worth it in this case.
Do not miss payments. Missing a payment is worse than a late payment. It is better to have a late payment than a missed payment. Missing too many payments will cause your account to go to collections and drastically lower your credit score.
Do not close paid-off credit card accounts. You might think that once you pay off a credit card, closing the account should be positive, right? Unfortunately, that isn’t always the case. If you paid that credit card each month on time and have good credit history reported, just leave the account open on your report. Use the credit card from time to time and pay it off each month to keep it active and continue reporting good credit history. However, having too many credit cards can lower your credit score. So close all the department store credit cards after they are paid off and keep a few major credit cards open.
Don’t apply for too many loans. Each time a lender requests your credit report, it gets noted. Too many inquiries can be considered negative and lower your credit score.
I hope this information has helped you see the importance of checking your credit report and knowing your credit score. If you are overwhelmed or do not know where to start, I will help you. Reach out to me, and we can work together one on one to get your finances in order. I want everyone to have excellent credit and feel confident when applying for a loan.