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What is a credit report?

A credit report (1) provides detailed information about your personal profile, bankruptcy records, employment history, and credit history; (2) lists who has reviewed your credit history; and (3) is used to determine your creditworthiness. Your credit history shows long-term details about your credit cards, loans, mortgages and other debts. The details given in your credit history often include monthly account balances, credit limits, and a monthly payment history. Your credit report flags payments more than 30 days late.

What is the difference between a credit report and a credit history?

The two terms are often used interchangeably. Technically, a credit history is just one component of a full credit report. A credit history lists account details about credit cards, mortgages, debts, etc. A credit report includes the credit history, plus it often includes personal information, employment information, etc.

How is my credit report used?

It is common for banks, landlords, employers, and you to review your credit report. The information on your credit report, particularly your credit history, is a very good predictor of your future commitment to meet your financial obligations.

• Banks pull your credit report to determine your creditworthiness when you apply for a credit card, loan, or other service.
• Landlords read your credit report when determining whether you qualify to rent their apartment or home to see you whether you reliably pay your bills. Tenants who pay their bills on time are also more likely to take better care of the property and cause less trouble.
• Employers check your credit report because patterns of responsibility in financial matters often carry over into the workplace.
• You should check your credit report at least once a year to check for inaccuracies and signs of identity theft. Inaccuracies on your credit report could affect your creditworthiness and thereby prevent you from qualifying for the level of credit that you deserve. By checking your credit report frequently, you can be alerted to identity theft and minimize the damage done.

What is a credit score?

A credit score is a single, numerical score that represents your creditworthiness based on information in your credit report. It is a statistical method of analyzing your creditworthiness. Although there are numerous credit score methods, the most widely used credit score is based on the Fair Isaac Co (FICO) algorithm. Possible FICO score values range from 300 to 850. A score of 300 is the worst rating possible, and a score of 850 is the best.

What is a good credit score?

Although scores vary on a continuum, creditworthiness is usually considered excellent if above 750, very good if above 720, acceptable if above 660, uncertain if above 620, and risky if less than 620. The average FICO score in the United States is somewhere in the upper 600s. Most people will qualify for the best interest rates and terms if their score is above 720.

How is my credit score calculated?

Your credit score is calculated from the information found in your credit report. The exact scoring methods are secret. Your score is computed from a variety of factors. No one factor determines your score. According to the myFICO credit education website, the factors that influence your score are:

• Payment history
• Length of credit history
• New credit
• Types of credit used
• Amount owed

Factors that do not influence your score are:

• Age, race, color, religion, national origin, sex and marital status
• Salary, occupation, title, employer, date employed or employment history
• Where you live
• Interest rates on credit cards or loans
• Consumer credit checks, employer credit checks, or “soft” credit checks for pre-approved offers
• Basically, anything not found in your credit report

How is my credit score used?

Your credit score is used primarily by banks to measure your credit risk. By using a credit score, banks ensure uniformity and consistency; everyone’s credit history is subjected to the same standard. Banks can more accurately determine your creditworthiness with a FICO score than they can by having employees evaluate your credit report directly.

Your credit risk, or creditworthiness, determines the interest rates and terms you receive on credit cards, mortgages, and other loans.

Banks aren’t the only ones checking up on your credit score these days. Auto insurance companies have found a statistical correlation between credit scores and the likelihood of getting in an accident. Put simply, people with higher credit scores have been found to be better drivers. (Their theory, based on the evidence, is that your credit score and accident history reflect an underlying pattern of responsibility.) Consequently, people with a better credit rating frequently pay lower auto insurance premiums.

What can I do to improve my score?

We’ve seen how your credit score can greatly affect your life. It can influence what house you live in, what car you drive, what your insurance premiums cost, and where you are employed.

Your credit score can be summed up in three words: history of responsibility. Build a history of responsibility, and you will improve you score. Here are three ways you can demonstrate responsibility to your creditors:

• Pay your bills on time. myFICO reports that the single greatest factor influencing your credit score is payment history. On-time payment is really all your creditors care about. All the other factors that influence your credit score simply tell your creditors how likely you are to pay your bills on time in the future. Being late just once can put a ding your credit score. Demonstrate responsibility by paying the balance due on time, every time.
• Keep your balances low. If your credit card balances are constantly near or at the credit limit, banks will think you have a credit problem. By keeping your balance under 30% of your available credit line, you will show that you can manage your credit wisely. Demonstrate responsibility by not maxing out your credit cards.
• Check your credit report for errors. Yes, creditors and credit reporting agencies can and do make mistakes. It is your responsibility to check your report for errors. If you find a damaging item on your credit report that is inaccurate, you should challenge it immediately with the credit reporting agency. It is important that you check for errors, because sometimes errors are actually the result of identity theft.

You must establish your history of responsibility over time. And over time, your responsibility will benefit you greatly. If you’ve made some credit mistakes in the past, now is not too late to get on the right track. With time your score will improve. In fact, even bankruptcies disappear from your credit record after 10 years!

Do not get suckered into “credit repair” services that promise the impossible. There is no way you can magically improve your credit history and score instantly. Improving your score always takes time, except when removing genuine errors from your credit report as described above. Credit repair services not only do nothing to improve your score, they can sometimes hurt your score!

How do I establish, build or re-build my credit rating?

The best way to improve your credit rating is to follow the steps listed above to build a history of responsibility.

Do I need to carry a balance on my credit cards to build my credit rating?

No. You do not need to carry a balance on your credit cards or pay interest in order to build credit. Your credit report, which your credit score is based on, does not indicate whether you carry a balance from month to month. The monthly balance listed in your credit history is only a snapshot of your account on the days that the credit card reports to the credit bureaus. Even if you pay off your balance in full every month, your credit history will still indicate a balance.

Who keeps track of all this stuff?

Your credit report is maintained by three major reporting bureaus: Equifax, Experian, and TransUnion. Not all creditors report to any or all of the three credit reporting agencies, but most do.

How can I get copy of my credit report?

You can get a copy of your credit report directly from any of the three credit reporting bureaus. Additionally, many third-party websites offer 3-in-1 packages where you can view your information from all three agencies in one unified report.

In most cases, you should be able to see your credit report for free. The recent Fair and Accurate Credit Transactions Act (FACT Act) provides for free credit reports from all three bureaus to all U.S. consumers once per year at www.annualcreditreport.com. The free credit report provision rolls out over a nine month period, starting in the western states.

As of December 1, 2004, people in the following Western states can get a free copy of their credit report: Alaska, Arizona, California, Colorado, Hawaii, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington and Wyoming.

Beginning March 1, 2005, the FACT Act goes into effect for the following Midwestern states: Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota and Wisconsin.

Starting June 1, 2005, the following Southern states will get their reports free: Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Mississippi, Oklahoma, South Carolina, Tennessee and Texas.

After September 1, 2005, the following Eastern states will be eligible: Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, Vermont, Virginia and West Virginia; the District of Columbia; Puerto Rico; and all U.S. territories.

If your state currently does not qualify for a free credit report, you can still get a free report. Many companies offer a free credit report as part of a no-obligation free trial offer for credit report monitoring services. You simply sign up for the free trial, get your credit report free, and decide before your thirty days are up whether you wish to continue with the credit monitoring service. Whether you decide to continue with the credit monitoring service is up to you. (You may find the service useful for preventing damaging identity theft.) Either way, you get a free credit report.

Anytime your credit application is declined, the Fair Credit Reporting Act (FCRA) entitles you to a free credit report.

The FACT Act and virtually all free credit report offers do not provide your credit score for free. However, you can usually opt to include your credit score for a nominal fee of several dollars.