It’s only three digits, but it can shape your world: your credit score. Generally speaking, if it’s high, lenders will be more inclined to offer you loans. You also may be able to get a lower interest rate, which means that taking the loan will cost you less overall. If your credit score is low, lenders may be wary of advancing you money and they’ll usually want something in exchange if they do – a higher interest rate.
And it’s not just lenders who are concerned about your credit history. Prospective employers, landlords and even your auto insurance company might want to know what’s in your credit report these days. Your score is an important number, and your credit report says a lot about you. Yet a surprising number of people don’t really understand what goes into either of them.
1. What does a credit report show?
Your credit reports – you actually may have more than one – contain information about your credit activity and current credit situation such as loan paying history and the status of your credit accounts. Each of the three major credit reporting bureaus collects information about you from your lenders, from service providers like your cellphone company, and from public records. If you have been convicted of a criminal offense, it may show up on your credit report.
Based on all of this information, companies may calculate a credit score to reflect your creditworthiness. Since each of the credit reporting bureaus produces a score, you may have at least three scores. Calculation methods may differ, and each credit reporting agency might not receive information from the same lenders and providers, so the scores may not be identical.
2. What Types of Information Can Affect Credit Scores?
So exactly what information goes into those scores? How promptly you pay your bills is a big factor. It might drop your score by up to 80 points if you’re 30 days late with a single payment to a creditor.
There are two types of credit inquiries: Hard and soft. Soft inquiries do not affect your score, but hard inquiries, particularly by lenders who are considering whether to loan you money, can affect your scores, even if you don’t ultimately get or take out the loan. This isn’t likely to drastically influence your scores, however. In fact, accepting a loan or opening a new account can impact your scores more, at least temporarily. Of course, if you then make regular, timely payments on that account, your credit may be positively affected.
Lenders evaluate your creditworthiness at their own discretion. They may use whichever scores they’d like and measure those scores on a scale that is unique to them. It’s also possible that they may not even rely on credit scores at all.
3. Your Score Is Less Than 850. Now What?
Pull a copy of your credit report to find out what’s on there. You’re entitled to one free credit report every year from each of the three nationwide credit reporting agencies. If you get turned down for a loan because of something in your report and you request the report within 60 days, you’re also entitled to a free copy.
And no, your credit won’t take a hit if you do this – it’s considered a “soft” inquiry. Creditors won’t see that you asked when they look at your credit report.
You have a right to dispute any information listed on your report. Notify the credit reporting agency if something’s not right and ask them to look into the situation. If they find the information you’re disputing is inaccurate, they’ll update it to make it accurate.
Assuming that all the information included in your report is accurate, look at your credit card balances compared to your credit limits. This relationship is called your credit utilization ratio, and it can affect your score. The closer you are to hitting your maximum limit, the more it may lower your score, so pay down those balances if you can.
Don’t necessarily take the scissors to your credit cards, though, particularly ones that you’ve had for a while – this won’t help and it could possibly hurt. How long you’ve been borrowing affects your score. The longer the better.
What if you have no real credit history at all yet? You can begin building one with just a single loan. You might consider a secured credit card. This involves putting a deposit down with the lender, perhaps $300. In exchange, you get a $300 credit limit. Use the card, pay your balances promptly and you’re on your way.
4. How long does a bad credit rating last?
Debts have finite lifespans, and so does negative information that appears on your credit report.
Unpaid debts that have gone to collections should disappear and stop affecting your score seven and a half years after your last missed payment – seven years, plus six months from the date you stop paying. This is the date that starts the clock ticking.
In fact, almost all negative information should fall off your report after seven years, with the exception of personal bankruptcy. Although a Chapter 13 filing will drop off after seven years, Chapter 7 will hang around for 10 years. If a creditor successfully sues you and gets a money judgment against you, this will appear for seven years also, but it might linger until the statute of limitations on the debt runs out. The statute of limitations will depend on state law. It can be anywhere from three to 15 years. It determines how long the creditor can try to collect from you.
5. Who Can See Your Credit Report?
Is all this information wide open and available to the public? No.
For the most part, your credit report can’t be accessed without your permission and the Fair Credit Reporting Act dictates which inquiries are valid. When you apply for a loan your express permission is required because the lender needs the information to determine whether to approve you, and you know that when you apply. Prospective employers can look at your credit report with your written consent. Auto insurance companies and potential landlords can also look at it when you apply for a policy or a lease.
So there you have it – the basics of credit. Pay down those balances, make use of that free credit report you’re entitled to each year, and don’t take on more debt than you have to. You’re on your way to healthier credit.