So, What is a Credit Score, Exactly?
First and foremost, you don’t have just one credit score: you have several. The most common scores are the ones assigned to you from each of the three major credit bureaus: Equifax, Experian and Trans Union. Each of these bureaus collects data from consumers and builds a file on their financial information over time.
The information contained on your credit report file usually includes your income, employer(s), addresses (past and present), telephone numbers, credit accounts including mortgages, loans, and credit cards, collection accounts, and public records such as bankruptcies and liens. The information contained in your file is run through an algorithm that produces a lending risk score, or credit score, which is unique to your individual report. Lenders use this credit score to determine the likelihood that you will repay a loan or credit account. Higher scores mean you’re more likely to repay the loan, while lower scores mean you are less likely to pay it back.
Credit scores can range anywhere from a very low 300 to a very high 850—or even 900 in select cases (depending on the score scale). Scores under 625 are generally considered to be poor or very poor. Scores of 699 or less are considered to be fair or average. Scores above 700 are good scores, while scores above 750 are optimal scores. The higher your score, the better chance you have at obtaining credit it a low rate.
There are many things credit bureaus take into consideration when calculating a credit score. These considerations can include:
How many credit accounts you have
How long you’ve had your credit accounts
How much your average balance is versus your overall credit limits on your accounts
How much debt you carry versus your income level
Whether or not you have past-due accounts or collections
How much you pay on your credit accounts each month
How many times you’ve applied for new credit in recent months
How many times you’ve been late paying on an account
The better your payment history, the less debt you carry and the longer your accounts have been open, the better. Those with no collection accounts or past-due payments combined with only small amounts of debt versus credit limits and income levels and older accounts will have higher scores, while those with ‘dings’ on their credit—things like collections or past-due accounts, high amounts of debt or accounts that were recently opened—will have lower scores.
Checking Your Credit Reports & Scores
All consumers, regardless of credit history, should actively monitor their credit reports from each credit bureau at least once per year. These reports are made available free of charge for all consumers on an annual basis via the only government-supported credit website, annualcreditreport.com. This is the only website authorized by the U.S. federal government, so beware of copy cat sites.
Consumers are not given access to their actual credit scores from their yearly annualcreditreport.com reports, but rather only their actual credit file information—the data that is used to calculate the score. The score itself can be purchased separately from the report. However, there are free services that allow the monitoring of credit scores—and in some cases, truncated credit reports—online. Sites like Credit Karma and Credit Sesame offer free score monitoring from some bureaus, but consumers should utilize these sites at their own risk as we cannot guarantee their accuracy. Many credit cards now offer free monthly credit score monitoring as well. Taking advantage of that option is another great way to stay abreast of your credit score.
Each of the three major credit bureaus holds a separate file on you, and the information contained in each file may be a bit different from the others. The files should all look similar, but even minor differences may reflect a difference in the credit score you receive from each bureau. For example, you may have an excellent score with Equifax and Trans Union, but a glaring issue with your Experian file may result in a much lower score from that particular bureau.
What to Look for When You Check Your Credit Report
When you are scouring your full credit report each year, be sure to keep an eye out for erroneous information that might be contained in it. The FTC says that an astounding one in five consumers have errors on their credit reports. Credit report inaccuracies can play a large role in decreasing your credit score and may hurt your ability to get credit or cause you to pay higher interest rates. These errors could include accounts you do not have or do not remember having, late payments reporting in error, collections accounts or public records that are not accurate, outdated information, or past-due accounts that you have paid off and are still reporting as outstanding.
If you find inaccuracies on any of your reports, take note of them notify the credit bureau reporting the errors in writing that you wish to dispute the erroneous entries on your report. While some credit bureaus do offer online dispute options, you are safer making the dispute via snail mail so that you have a paper trail to prove that you filed the dispute.
What Happens After a Dispute is Filed?
Once you’ve filed disputes on your credit reports, the credit bureau will have a set amount of time to investigate each dispute and notify you of the outcome. In some cases, it can take a credit bureau up to 60 days to process a credit dispute.
Once the investigation is complete, you will be notified as to what course of action was taken on your dispute. There are three possible outcomes. The bureau will either decide in your favor that the entry was incorrect and it will be removed from your report, they will decide that your dispute doesn’t hold water and that it will remain on your credit report, or they will update the entry with the correct information (for example, if you have a collection account stating that you owe $500 to XYZ company but you actually only owe $200, the account will be updated to reflect the correct information).
Having the erroneous information removed from your credit report is obviously the most favorable outcome and could result in an increase in your credit score nearly immediately.
So what else can you do to improve your credit score?
If you’ve got a low credit score, the worst thing you can do is nothing. Bad credit isn’t something that heals without intervention. Being proactive is integral to restoring your financial integrity, so here are a few tips to increase your credit score.
Pay off charge-offs and bring accounts current. Even charge-offs that are many years old can still significantly reduce your credit score. Take note of the name of the company who owns the debt (charged-off accounts are often sold to third party collection agencies) and call them to make payment arrangements that fit into your budget. Let them know what you can afford, and in most cases, they will be more than willing to work out an arrangement with you. Work through the collection accounts one at a time until you’ve satisfied all of them, even if it takes you years to do so.
Don’t close accounts. If you’ve got older credit accounts that you don’t use anymore or are considering closing so that you won’t be tempted to use them, don’t. If at all possible, leave your account in open status. Doing so will look good on your credit report, for as those accounts age, they give your credit history more depth. Just make sure you keep the payments up to date if you’re using the card. To reduce temptation, simply don’t carry the cards with you while you shop.
Pay more than the minimum. If you have a lot of debt on your shoulders, don’t be tempted to pay only the minimum required payments on your accounts. Constantly making minimum payments not only costs you more money in the long run, but that bad habit will show up on your credit report and can lower your credit score. If you cannot make large payments, aim for at least double the minimum payment so that your credit file will reflect as such. Of course, if you can only afford the minimum payment, it’s certainly better than allowing your account to go past-due.
Get a secured credit card. If you are unable to get a traditional credit card, you can build you credit by obtaining a secured credit card. With a secured card, you’ll pay a deposit equal to or less than your credit limit to let your lender know that you’re a safe credit risk. For example, you may be required to pay $300 for a $300 limit, or you might be required to pay a $100 deposit for a $300 limit. The state of your credit report and the parameters of the credit card will determine the amount of the deposit.
Secured cards work the same way unsecured cards do: you’ll make your deposit, then charge on the credit card like you would any other card. A monthly statement will be mailed to you each month and you’ll pay it the same as you would a traditional card. With a history of on time payments, some secured cards will automatically transition to unsecured products and you will receive your deposit back. Secured cards are a great way to prove that you are credit worthy and your credit score will increase over time as you make timely payments.
Refinance Your Home. If you’re a current homeowner and you feel like you are drowning in credit card debt, refinancing your home is a great option to pay off those credit cards without getting that empty wallet feeling. Homeowners can utilize their equity to pay off credit cards at a much lower interest rate and allow themselves to do it all with one low, affordably monthly payment. Not only will this help you save money each month, but it can also increase your credit score by showing all your credit cards as being paid in full. For more information on how to refinance your home and use your equity to improve your credit score, call NLC Loans toll free at 866-480-8050.