CREDIT REPORT AND CREDIT SCORING
CREDIT REPORT
A credit report is the equivalent of a consumer's "financial report card." It details your credit history as reported to the credit reporting agency by the lenders who have extended you credit. Your credit report lists the types of credit you use, the length of time your accounts have been open, and whether you pay your bills on time.
Many different companies use your credit report to make decisions about you. Credit card companies, banks, mortgage lenders, auto loan providers, insurance companies, as well as landlords and employers, check credit reports to assess your credit history. They understand that if you have been responsible in the past, you are likely to be responsible in the future!
CREDITSCORING
Credit scoring is a system creditors use to help determine whether to grant you credit and how much to charge you for it. When you apply for credit, the creditor or lender will often request your report (or credit score) from one of the big three bureaus: Equifax, Experian, or TransUnion. In some instances, such as when applying for a mortgage, the broker or lender will pull reports from all three. These bureaus assess your "creditworthiness" by calculating your credit history against a system called the Fair Isaac Model (FICO). Fair Isaac uses a variety of factors to determine your score, including bill-paying history, the number and type of accounts you have, late payments, collections, outstanding debt, and the age of your accounts.
The final results of these calculations are referred to as your FICO score. FICO® scores range from 300 to 850, with the majority falling between the 600s and 700s. Higher scores indicate a lower credit risk. A FICO® score above 700 will typically secure you a very good mortgage rate, while a score above 720 will get you an excellent rate. Correcting mistakes on a credit report to improve an undesirable credit score takes time. It is your responsibility to address any inaccuracies that may appear in your credit report. To do this, you must contact each of the big three credit reporting bureaus to correct any misinformation. Mistakes can remain on your credit reports for up to seven years, with some items lasting up to ten years.
The truth is, successful credit repair is a gradual process that takes time to complete. Most people didn't develop bad credit overnight, and it can't be fixed overnight either. It requires time, hard work, patience, and, most of all, persistence. But it does work! It's a marathon, not a sprint!
QUICKEST WAY TO RAISE YOUR SCORE
The quickest ways to raise your credit score include paying down debt and improving your debt-to-credit ratio, also known as your credit utilization. Opening a new credit card can help improve your utilization, although applying for a card may temporarily lower your score by a few points.
Another effective strategy for quickly boosting your score is to start making your payments on time. This approach tends to raise the score more significantly for individuals with little credit history and no prior credit issues compared to those with major credit problems.
Additionally, removing incorrect or negative information from your credit reports can help improve your score. You can obtain free copies of your three credit reports once a year by visiting AnnualCreditReport.com or the websites of the three main credit reporting agencies: TransUnion, Equifax, and Experian.
Getting a secured credit card can also be a great way to start rebuilding your credit. Some secured cards offer better terms than others. If you’d like a list of recommended options, just let me know and I’ll be happy to share it!
SCORE RANGES
What's more important to lenders than your exact score is the Scoring Range in which you fall. Credit scores from the two major scoring companies, FICO and Vantage Score 3.0 Solutions, range from 300 to 850. Their ranges include ratings from POOR to EXCELLENT!
5 Ways to Improve Your Credit Score
A credit score is a three-digit number that lenders use to assess risk. Most consumers will have three credit scores, one from each of the three main credit bureaus: Experian, Equifax, and TransUnion.
Essentially, your score indicates how likely you are to repay borrowed money in full and on time. This number is crucial, as it not only influences whether a lender will approve your loan but also affects the amount, terms, and flexibility they offer.
When aiming to improve your credit score, remember that there are no quick fixes. The following tactics may not yield the same results for everyone, as each credit score is unique—much like a thumbprint. However, here are five proven strategies to help improve your score:
1.Always Pay Every Month On Time.
Consistently making on-time payments is crucial. The longer you maintain this habit without any mistakes, the better your score will become. Think of it like stubbing your credit score's toe: if you miss a payment by 30 days, it can significantly hurt your score. Remember, payment history accounts for 35% of your FICO score.
2.Keep Credit Card Balances Low.
To improve your score, aim to pay down your credit card balances as quickly as possible. Ideally, keep each card's balance below 30% of its credit limit. Balances over this threshold can negatively impact your score. Credit utilization makes up 30% of your overall score.
3.Keep Those Old Credit Cards—Never Close Them.
Maintaining older credit accounts can positively impact your score. The longer your credit history, the better it reflects on your creditworthiness. While it may feel satisfying to close an old card, doing so can harm your score. Negative marks are assessed over your entire credit history, and the age of your accounts contributes 15% to your FICO score.
4.Don't Close Credit Card Accounts After Paying Them Off.
Closing a zero-balance account can actually hurt your credit score. While paying off debt is positive, it also reduces your available credit, which can negatively impact your debt-to-credit ratio. Keeping those accounts open helps maintain a higher available credit limit, which is beneficial for your overall credit utilization.
5. Limit the number of HARD Inquiries to a minimum.
Hard inquiries area signal that you are looking for credit, and each HARD inquiry can lower your credit score by 3-2 points.
