Credit Education: What is a Credit Score?
The majority of people understand the basics, like how failing to make a payment will cause your score to go down, but there are a number of complexities that trip up the average consumer. If you pay your debts on time, don’t carry too much debt on any one card, don’t close older accounts unless absolutely necessary and only apply for new credit when you have to you will generally be in good shape. However, it is important to keep yourself informed so you can maintain a credit score that accurately reflects your consumer status.
Lenders use your credit report in order to judge your reliability as a loan candidate. Your credit report indicates your ability to handle debt responsibly and will help banks decide if you are a desirable loan customer. A high credit score can help you lock in low APR rates or secure special deals on loans. A bad credit report may prevent you from securing loans and can damage your ability to buy a car, open a credit card or rent a home. A history of inability to manage your credit successfully will make lenders uncomfortable about trusting you with additional funds in the future.
You are entitled to a free copy of your credit report once a year, an offer you should take advantage of. When you do receive your credit report, check to ensure the figures are accurate and act quickly to correct any mistakes. This may include any clerical errors, identity theft issues or incorrect information. If your credit score is low, you should begin working on a financial rehabilitation plan, either on your own or with a certified debt counselor, to begin correcting your bad debt habits.
Thousands of people have been able to improve their credit score by repairing their credit reports. If you have had difficulty getting reasonable loans in the past, raising your credit score through credit repair can help you qualify for lower interest payments. These lower payments can help you purchase a new car or even get into a new home.
Even if your credit score is good enough to get a loan, improving it by just a few more points can save you thousands. Using credit repair to increase your credit score from 680 to 720 can save you a hundred dollars or more per month on your mortgage payment; a savings of tens or even hundreds of thousands of dollars over the course of your loan.
You can clean your credit yourself or you can get help from a credit repair expert. This is a top ten list of the best credit repair companies out there. Don’t agree with the list? Vote for an existing item you think should be ranked higher or if you are a logged in, add a new item for others to vote on.
The majority of people understand the basics, like how failing to make a payment will cause your score to go down, but there are a number of complexities that trip up the average consumer. If you pay your debts on time, don’t carry too much debt on any one card, don’t close older accounts unless absolutely necessary and only apply for new credit when you have to you will generally be in good shape. However, it is important to keep yourself informed so you can maintain a credit score that accurately reflects your consumer status.
Lenders use your credit report in order to judge your reliability as a loan candidate. Your credit report indicates your ability to handle debt responsibly and will help banks decide if you are a desirable loan customer. A high credit score can help you lock in low APR rates or secure special deals on loans. A bad credit report may prevent you from securing loans and can damage your ability to buy a car, open a credit card or rent a home. A history of inability to manage your credit successfully will make lenders uncomfortable about trusting you with additional funds in the future.
You are entitled to a free copy of your credit report once a year, an offer you should take advantage of. When you do receive your credit report, check to ensure the figures are accurate and act quickly to correct any mistakes. This may include any clerical errors, identity theft issues or incorrect information. If your credit score is low, you should begin working on a financial rehabilitation plan, either on your own or with a certified debt counselor, to begin correcting your bad debt habits.
What Makes Up a Credit Score?
Your credit score is determined by an algorithm developed by the Fair Issue Corporation (hence its other name of FICO score). Three corporations, called “credit bureaus”, specialize in collecting and reporting on financial histories. Those three companies are Equifax, Experian and TransUnion. While, the exact formula used to calculate your credit score is a tightly guarded industry secret, these companies provide general guidelines about financial behavior that can affect your credit score.
Payment History
Thirty-five percent of your credit score is made up by your payment history. This includes late payments, collections, and even bankruptcies and tax liens. Each type of account will stay on your credit report a specified period of time and each type of derogatory will hurt your score differently.
Debt Ratio
Your debt ratio is the amount of revolving credit (i.e. credit cards) you owe in relation to the amount of credit you have available. For instance, if your credit limit is $10,000 and your current balance is $2,000, your debt ratio would be 20%. While, ideally, you would have your debt ratio at 0%, we usually recommend you are at least at 30% or lower.
Length of Credit
Your length of credit is how long you have had credit. At face value, this seems like something you couldn’t really do anything to fix. However, there are ways you can hurt yourself here. If you close out your older cards, even if they have higher interest rates, it will hurt your score. The credit scoring model has no memory or credit cards you close: if you close out that fifteen year old card you will get no credit for it!
Types of Credit
Types of credit include revolving, installment and mortgage loans. By having different kinds of credit open, you show creditors that you are responsible and able to handle different kinds of responsibilities.
Inquiries
Inquiries are marked on your credit report when you ask for new credit (i.e. when you apply for a home loan). Inquiries made by yourself or for unsolicited offers do not count against your score, but are shown on your report. It is important to note than when searching for a home you are allowed unlimited inquiries over a 45 day period since it is assumed you are rate shopping.
A
Account Types: The types of records appearing on your Credit Report, such as mortgages, student loans, auto loans, credit cards, charge cards, and service accounts.
Accounts in Collections: Accounts that are seriously overdue and may have been turned over to a collection agency.
Accounts Listed Negative: Negative accounts are those that have not been paid or have been paid 30, 60, 90, or 120 days late.
Average Account Age: To calculate the “mean” or “average” age of your accounts, add the number of years you’ve had each account, and then divide this sum by the total number of accounts.
C
Count of Records: The total number of accounts, inquiries, and public records that appear on your Credit Report.
Credit Cards: A plastic card allowing someone to make purchases on borrowed money.
Credit Summary: This contains information about your unsecured credit lines.
Current Negative Status: Any accounts listed as negative within the last 30 days.
D
Debt Summary: Snapshot of all the money owed separated by account type.
E
Experian® Credit Score: A Credit Score summarizes your credit history into a number that lets lenders and others quickly know how responsible you have been with your past credit accounts and loans. Experian uses the “PLUS Score,” an educational Credit Score that can range from 330 to 830, with a higher score indicating lower credit risk.
H
Hard Inquiries: This type of inquiry appears on your Credit Report when you give a business, financial institution, landlord, or employer permission to check your credit in order to open a new account, obtain a loan, rent a property, or get a job.
I
Installment Debt: Credit accounts in which the debt is divided into amounts to be paid successively at specified intervals until the debt is paid off.
Installment Loans: These are loans you agree to repay over a specified time period a pre-determined schedule of monthly payments.
L
Length of History: The total length of time you have had a credit file.
M
Monthly Payment: This is the total amount of money you repay to your creditors each month.
Most Negative Status: This reflects the worst status contained in your Credit Report. For example, if the worst status in your Credit Report is 30 days late, then this section will indicate “30 days late.”
N
Negative Information: This includes loan defaults, late payments (payments that are more than 30 days past due), delinquencies, charge-offs, collections, and public records.
O
Oldest Account: The account that has been in your credit file for the longest period of time
P
Public Records: This is information that has been reported by local, state, federal or other government agencies about legal matters associated with your name. The most common Public Records include bankruptcies, tax liens, state and county court records and monetary judgments.
R
Real Estate Debt: Any debt that has been used to buy a home or has been secured by your home. For example, a home equity loan can be a real estate secured debt.
Real Estate Loans: This includes mortgages and other property loans (primary and secondary loans).
Retail Cards: A plastic card issued by a specific retailer or group of retailers for limited use at their own stores.
Revolving Credit Accounts: An account from which credit is automatically available up to a predetermined maximum limit as long as a customer makes regular payments.
Revolving Credit Available: Your available credit is the difference between the unused amount of your credit lines and the amount that you have already borrowed.
Revolving Credit Limit: These are lines of credit that you open without any collateral security.
Revolving Credit to Debt Ratio: This number helps lenders determine your risk level. It is calculated by dividing your debt by the credit limits on your revolving accounts.
Revolving Debt: Line of credit (most commonly includes credit cards or retail cards) that enables borrowers to use available funds as needed. These lines of credit typically require a monthly or annual membership fee.
Risk Level: In determining Credit Scores, lenders place you in a risk category that compares you to a large number of consumers with similar credit histories. This allows lenders to compare “apple to apples,” ensuring that your credit behavior is judged in a context that is relevant and fair.
S
Score Rank: This is how your Credit Score compares to a representative sample of U.S. consumer credit profiles. The higher your rank, the better your Credit Score.
T
Total Accounts: The total number of mortgages, loans, credit cards, charge cards, and service accounts that appear on your Credit Report.
Total Debt: This is the total amount of money you currently owe on that has been reported to the credit reporting agencies.
Total Open Accounts: This is all of the accounts listed as having an “open” status on your Credit Report.
