Everything You Need to Know About a Credit Score

Fran
Fran Majidi
August 14, 2020

A credit report is important for many reasons. If you plan to buy a home or buy a car, your credit score will determine your eligibility. A low credit score may end up costing you money too, especially if you live in a state that uses credit to determine car insurance rates. Let’s look at what a credit report is and how to read it.

What’s a Credit Report?

People who are debt-free think that they don’t need to pay attention to their credit reports, but that’s just not true. A credit report rates your credit history to determine the “risk” you pose as a customer, as a borrower and more. It not only shows how much you’ve borrowed but whether or not you’ve been making timely payments on bills.

A credit score does not determine your net worth or reflect how much money you have. It just evaluates how you’ve fared in terms of your debts. If you’ve never borrowed money or had a credit card you’ll have no credit, which simply means you haven’t borrowed and owed money. It may be sensible to establish some credit, even if you don’t really need to borrow money.

What Do the Numbers on a Credit Score Mean?

Your credit score will fall within a range of numbers, 300-850. The higher the score, the better you will fare with lenders. Your score is determined based on credit history, or the number of accounts you opened and repaid. If you have a good credit score, it indicates that you pay your bills in a timely manner. Here’s how you’re rated:

  • 800-850 Excellent
  • 740-799 Very Good
  • 670-739 Good
  • 580-669 Fair
  • 300-579 Poor

What Is My Credit Score Based On?

Your credit score is based on payment history, amount owed, length of credit history, types of credit and new credit. Payment history is 35% of the score, total amount owed is 30% and 15% is the length of credit history. The longer your credit history, the less risk you pose, if you have good credit, because there is more data to determine your payment behavior. The type of credit used is also 10% of your score. Having a mix of credit, like revolving credit (credit cards) as well a mortgage or car loan or even student loans, is a good thing as long as you’re making timely payments. Also, new credit counts for 10%, factoring in the number of new accounts opened and how many.

Why Do I Need a Good Credit Score if I Rent?

You may still need a good credit score to rent an apartment. In fact, many apartment communities have the option of being added to your credit history to prove you do pay rent on time and in full. You also need credit to buy a smartphone, cable or other utilities. Your credit score will also determine your interest rate and/or credit limit.

What’s in a Credit Report?

In addition to your name, address and social security number, a credit report, you’ll see the following information:

  • The date you opened any credit accounts.
  • The date you took out any loans.
  • Your payment history
  • Credit limits
  • Total loan amounts
  • Bankruptcies
  • Tax liens

Why is this information gathered? Credit reporting companies provide this vital information to companies you apply to get a loan or credit card from. There are three main credit-reporting companies, and you can obtain a free credit report from each of them:

  • Equifax
  • Experian
  • TransUnion

Your reports will vary slightly with each of these companies. You can reach these companies directly for a credit report. Sometimes your bank will offer you a credit report at no cost, even if you’ve used your once-a-year report. So you may want to call your bank and even your credit card company to see if they have any free credit monitoring programs, especially if you’re trying to fix your credit and want to see how it’s improving over six months versus a year.

How to Read Your Credit Report

Identifying Information

It’s important to give this information more than a cursory glance. There may be others who share the same name as you. Make sure all the information in this section is correct and that your name is spelled correctly.

If there are addresses listed here where you’ve never lived, you’ll have to make corrections.

  • Name
  • Address
  • Social Security number
  • Date of birth
  • Phone number

Credit History

This section will detail all accounts you’ve opened, like car loans, mortgages and credit cards. You’ll also see accounts you share with others. All loan amounts will be there, along with remaining balances on those loans. Late payments are also noted here. Accounts that have gone to collections will also be in your credit history.

This section needs to be completely error free. Make sure all closed accounts are noted as being closed. If you see any accounts you did not open, you may be at risk for identity theft. If you see a “U” next to an account, it simply means that it has not been updated. Often, it means the account is past due or in collections.

How Do I Make Changes to My Credit Report?

You will see an address for each reporting company by writing a letter. You’ll need to take up any mistakes you see on your credit report with the agency that has reported inaccuracies. So, if you see the same inaccurate information on all three credit reports, you must send a letter to each one.

In the letter, list all the incorrect items. If you have documents proving that it’s a mistake, send copies to each one. You may want to consider having these letters certified with a return receipt. The credit bureau has 30 days to respond.

Who Sees My Credit Report?

Not everyone can see your credit report, and the laws surrounding it differ from state to state. However, banks, creditors, lenders, insurers, landlords and certain government agencies are able to see your credit. So can some potential employers. It’s good to note that there are often soft inquiries made on your credit without your knowledge or consent. A company may check your score to decide whether or not to inform you about a promotional offer. This is a soft pull and won’t affect your credit score. Neither will a check on your credit for car insurance.

How Can I Improve My Credit Score?

The great thing about your credit score is that you can always build it back up, if you ever face financial hardships that bring it down. Begin paying your bills on time, and in six months you should see an improvement in your score. Also, asking your credit card company to increase your credit but don’t spend on it, to keep your credit utilization rate in good standing.

Closing a credit card account is both unnecessary and it can hurt your credit. Simply stop using your credit card if you’ve determined that it helps you stay within your budget. After you’ve improved your credit, your car insurance rate will be even lower. You can even see what your rate is now by entering your zip code below.

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