Credit Reports - What are they and how are they used?

MONEY

Mar 11

Credit reports can be confusing! While a recent FICO survey (link to survey article -https://www.fico.com/en/newsroom/consumer-survey-reveals-key-relationship-between-financial-confidence-and-credit-scores#:~:text=While%20the%20majority%20(90%25),37%25%20check%20their%20scores%20monthly) determined that about 90% of Americans somewhat understand what a credit score is, the same survey also determined that only 37% check their credit score monthly.

Trust me when I say that I have been there! I knew in general what a credit score was, but I didn’t understand its true importance.

In this blog post, I am going to share 5 credit score tips that I’ve used to increase my own credit score and some helpful general information regarding credit scores in general. I will be covering:

What is a credit report
The 5 factors in calculating your credit score
The 2 most effective ways to increase your credit score
Credit monitoring services and the importance of using them
Common uses of your credit score
What to do if you already have “bad” credit

I was lucky in that I had parents that understood the importance of being financially literate. They didn’t teach me EVERYTHING I know, but by the time I was in high school, I had a pretty basic understanding overall.

Even with that understanding, there were many things that I didn’t know. I didn’t have a great foundation for saving money, I didn’t know how to apply for a loan, and I didn’t have any credit cards. While I had a lot of information, I also didn’t really know anything about credit reports and credit scores until I landed my job as a mortgage loan officer in 2015 at the age of 21 years old.

I am now almost 29 years old, with a credit score of over 750. It took me a while to get here - so if your score isn’t up to par just yet, don’t fret. You can still fix it! I’m going to share the tips and information I used to get myself AND my husband’s scores above 750.

What is a credit report?

We already established that 90% of Americans understand what a credit score is, but for the other 10%, I will give a brief description of a credit score and a credit report.

A credit report is a financial report developed by FICO (FICO standing for Fair Isaac Corporation - This is why you may hear a credit score referred to as a FICO score) in order to assess the risk of extending an individual credit (in simpler terms - a loan or service of some kind).

The credit “score” is the numerical value given to that assessment of risk. Easy enough, right?

There are 3 major credit reporting bureaus in which you can obtain your FICO score.

Experian
Equifax
Transunion

Each bureau has multiple available score equations developed by FICO, and each entity that uses a credit score can use any of those available credit score versions. This is what makes them so hard to understand by!

In general credit scores have a range of 300 to 850. The idea is that the higher the score is the lower risk is assessed with the borrower.

The 5 Factors that Determine your Credit Score

Payment History - 35% of Score

It’s not hard to understand why payment history would be the most critical part of a score being used to determine your credit risk. This is literally the factor that tells a lender if you historically pay your debts. This is why it is so important always to make your payments within their due dates.

HOWEVER - and this is a BIG tip if you HAVE to make a payment late, know that while you may have to pay a late fee if you make your payment before it is 30 days past due it will NOT affect your credit score.

I still don’t recommend it given that you are now behind exponentially, but I don’t think there is enough education on what actually institutes a late payment regarding your credit score.

Knowledge is power, baby!

2. Credit Balance vs Credit Limits - 30% of Score

The second most important factor in determining your credit score is credit balances vs credit limits.

While it is the 2nd on the tier of importance to FICO it should be the most important factor to you as the consumer! Why? Because this is the easiest, most straightforward way to improve your credit score!

Payment history has a higher weighted importance, but you can only make so many payments, and that history can only add up so fast.

Making just a few smart decisions with your credit limits and balances can significantly improve your credit score in a shorter period of time than any other factor.

The best route to navigating this factor and making it work in your favor would be to keep your limits as high as possible and your balances as low as possible. As long as you aren’t paying a fee to keep the credit line open, having more available credit is going to help you raise your score.

Also, keep in mind that the most important thing is keeping your TOTAL balances as low as possible and your TOTAL limits as high as possible. There is a common misconception that you should keep each card at a maximum usage amount of 30% - this just isn’t true. If you have a favorite card, by all means, use it. Just make sure you have some other lines with ample available credit at your disposal as well.

3. Age of Credit Accounts - 15%

The third factor that goes into credit scoring is the age of your accounts, or the length of time you’ve had credit. This matters per credit line, so if your oldest credit line is a credit card your parents got you when you were 16, try to keep it open! If you close this account, the next oldest account would be what your credit age is now based on. So if you’ve only had two credit lines ever, and you close the first one that was open for 5 years, and the only other credit account you have is 6 months old this will negatively affect your credit score.

4. New Credit - 10%

New credit refers to new credit inquiries. When you apply for a new loan it will show up on your credit report as a credit inquiry. You’ll notice inquiries only account for 10% of your score, which tends to be about 3-7 points per inquiry except in the case of shopping for a home, car, or student loan.

FICO has allotted for consumers to “shop” lenders. If you apply for the same type of credit within a certain amount of days - all of those inquiries will be considered one inquiry in your score.

Types of Credit - 10%

Lastly, the types of credit on your report can affect your score. While this is a factor, I would worry the least about this category. While it is best to have a mix of credit types, you can still have an outstanding score with just a few. The main two would be installment (think car loan or home loan), and revolving (most common would be a credit card).

RECAP - Two Most Effective Ways to Increase Your Score

The absolute MOST effective way to increase your score is to always make your payments on time. However, understanding this is painstakingly slow, especially if you’ve already had some late payments, that brings us to our second way to increase your score.

As mentioned above, the second way to increase your score is to keep your limits high and your balances low.

Say it with me….” Keep your limits high, and your balances low!”.

Credit Monitoring Services & the Importance of Using Them

A credit monitoring service is a service that allows you to keep an eye on your credit score, new accounts opened, payment history, etc.

Everyone should be actively using and checking some sort of credit monitoring monthly! The quickest way to spot identity theft, or a stolen credit card number is to know your score, and your accounts opened at all times!

Identity theft and fraud in general is always on the rise. The increasing use of the internet and online shopping has left everyone more vulnerable to fraud.

By monitoring your credit report and staying on top of your accounts and knowing your balances you will have a much easier time spotting any fraud that can occur on your account and ultimately affect your credit score.

What to do if you already have “bad” credit?

While there is no shaming happening here, unfortunately, it is much harder to get your score back on the up and up after having some snafus than it would have been to just maintain it.

HEAR ME - you are not doomed forever!

I would definitely recommend applying for at least one small credit card and using it for just gas. Pay that card off prior to the end of your billing cycle every month to avoid paying interest and establish some positive payment history.

If this isn’t an option for you, check with your financial institution to see if they offer any type of “shared secured” loan. This may have a different name, but basically, you would provide an amount of cash - could be as small as $250 or so, and they will pledge it for your loan and give you the $250 back. As you make monthly payments (which you can usually determine the payment amount yourself) the pledged funds become available. While you’ll still be paying a little bit of interest, it is a great and safe way for you to establish some positive history!

If you’ve had issues with collections or medical debt in the past, you may consider talking with a credit counselor. While I have never used one personally, I had many members who did.

I would recommend doing a search for yourself and checking reviews!

A great resource with many candidates would also be Fiverr.

Check out financial consultants here: https://go.fiverr.com/visit/?bta=704311&brand=fiverrcpa&landingPage=https%3A%2F%2Fwww.fiverr.com%2Fsearch%2Fgigs%3Fquery%3Dfinancial%2520consulting%26source%3Dtop-bar%26ref_ctx_id%3D9c16e71b9098e03371ae6875cb12ee1e%26search_in%3Deverywhere%26search-autocomplete-original-term%3Dfinancial%2520consulting

Conclusion

I hope this information can lead the way to improving your credit score!

5 Tips to a Stressless Home Loan Application

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Mariah Cooper