What Makes Up a Credit Score?

Credit scores can be complex and difficult to understand. However, it is important to grasp what makes up a credit score so that you know what you have to pay attention to when trying to maintain or improve
your credit score.

Credit Bureaus

There are three major credit bureaus that have credit information and scores on you. These are Equifax, Experian and TransUnion. All three of them will have different scores for you as they calculate things
differently.

Payment History

Your payment history makes up 35 percent of your score. This will include if you made payments on time, how much you paid, and any collections, delinquencies or bankruptcies. Late payments and delinquencies will cause you to lose points in your score.

Amounts Owed

The amount you owe on your credit accounts makes up 30 percent of your score. The percentage of credit used will be ratioed against the amount of credit you have available on individual accounts. The lower the percentage used, the more points you get towars your score.

Other Categories

Length of credit history, new credit, and types of credit used are the other categories that make up a credit score with 15 percent, 10 percent and 10 percent respective weights. The longer the credit history and the less new credit the better your score will be.

Considerations

It is important to monitor your credit reports and scores so that you can make sure the information that is being reported on your accounts is accurate and that your score is being affected by negative things
that you can change.

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How to Get a Free FICO Credit Score

Obtaining your credit report helps you determine what areas need attention to improve your credit score, such as paying off a debt or making payments on time. You can also check for errors in the report, and make sure that no one is committing credit fraud by using your personal information. Several companies and websites offer free credit score reports if you sign up for a free trial of their service, and FICO is one of those corporations.

Instructions

Obtaining Your Free Credit Score through FICO

1

Visit the myFICO website (see the Resources link) to sign up for Score Watch -- a credit-monitoring program. Choose the free trial option and click on the "Subscribe Now" button. Follow the prompts to sign up for the Score Watch free trial. Note that you are signing up for a 30-day free trial of FICO's Score Watch to obtain your free credit score report. Upon the expiration of the 30-day trial, FICO charges an annual fee of about $90 to the credit card number you provided to maintain your Score Watch account. If you don't wish to pay the annual fee, you must cancel your account before the 30-day trial expires. FICO will send you a reminder email one week before your trial expires.

2

Make sure the web pages that require personal information are secure before providing any details. A page is secure only when it has "https://" at the beginning of the page URL and a little yellow padlock in the bottom right side of the browser.

3

Follow the prompts to set up your Score Watch profile after your receive confirmation of your free trial subscription. During setup, you will set a target credit score that Score Watch then guides you through achieving. You can also set up email and mobile alerts.

4

Obtain more information and details on your FICO credit score by accessing your Score Power Reports. You will find tabs on your FICO credit score, and tabs for your credit report to look at further credit details.

Obtaining a Free Credit Score by Other Means

5

Request free credit reports from all three credit-reporting agencies annually through AnnualCreditReport.com. You can request reports through the website form, by telephone toll-free at 877-322-8228, or by downloading the mail-in request form and sending it to the office in Georgia. Requests by phone or mail may take up to 15 days to process and up to 3 weeks for you to receive. You can only request reports through this website once a year, but are entitled to the credit reports without hooks or gimmicks by federal law. While these free reports will not provide your actual credit score, they will provide enough detail on your credit history that you can get an idea what your credit score might be.

6

Visit Credit Karma (see the Resource link) to obtain a free credit score. Credit Karma does not require a credit card number or a 30-day trial to provide you with your credit score. To offset the cost of providing credit scores, Credit Karma sells advertisements on its website.

7

Sign up for a free seven-day trial of Triple Advantage, Experian's credit-monitoring program, and receive a free credit score. If you do not cancel your subscription to Triple Advantage within the seven-day period, then monthly charges of $14.95 will appear on your credit card bill until you cancel the service. The other two credit bureaus have similar programs with similar pricing--TransUnion's program is called 3 Bureau Credit Monitoring, while Equifax offers Credit Watch.

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What Is the Average Person's Credit Score?

Your credit score gives you a good or bad reputation in the eyes of banks and lenders. It is based on your credit history and tells them whether you are fiscally responsible. You may not even know your score because you are not entitled to get it for free. You can purchase it from Fair Isaac Corp.--or FICO, the company that developed the score--or from the credit bureaus to see if you fall within the national average or in a more desirable range.

Definition

A credit score is a three-digit number compiled by FICO or the credit bureaus. It's a quick indicator of your creditworthiness. The score is calculated with a formula that considers financial data like loans, credit cards and other accounts, payment history, available credit lines and amount of credit currently used. FICO is the most widely used score. It ranges between 300 and 900, with higher numbers indicating less credit risk.

Average

Creditreport.com pegs the average American credit score at 680. This is not high enough to qualify for the best interest rates or more desirable loan terms, but it doesn't impair the consumer's ability to open new accounts.

Location

Average credit scores vary widely by state. Creditreport.com reports that South Dakota residents have the highest score, with an average score of 710. Texans came in lowest, with an average score of 651.

Range

Creditreport.com advises it is best to fall within the range of 720 or above with your credit score. This score allows you to get almost any loan, mortgage or credit card you desire at the most competitive interest rate. You may also get better terms, such as waived annual fees or special credit card rewards. You will have problems if you score is 520 or below. The interest rates you are offered will average 3 to 4 percentage points higher than those offered to consumers with higher scores. You may be turned down completely if your score is very low.

Considerations

You can raise your credit score to a desirable level by focusing on the most heavily weighted factors. FICO explains that 35 percent of your score comes from your payment history, including delinquencies and court judgments against you. Your account balances and the amount of available credit as compared to how much you actually use makes up 30 percent of the credit score. Fifteen percent is based on the length of time you've been using credit and how long you're had specific accounts. Recent credit and the variety of accounts you use each count for 10 percent. Paying your bills on time is the single most important step you can take to raise your score, according to FICO.

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What Does Delinquency on a Credit Report Mean?

Credit reports are financial records that record virtually every loan, credit card and other account. The Federal Reserve Bank of San Francisco explains that the information is gathered, stored and regularly updated by credit reporting agencies such as Equifax, TransUnion and Experian. They sell it to banks and companies evaluating credit and insurance applications. Certain items, such as delinquencies, affect the ability of borrowers to qualify for new accounts.

Definition

A delinquency refers to an account that is not being paid on time. Payments become delinquent when they are not received by the due date. Creditors report this information to the credit reporting agencies, which add it to the consumer's files. The length of the delinquency is noted, as lengthy delinquencies are more harmful to the person's credit rating. Late payments on multiple accounts are also very bad because the FICO credit score company states that 35 percent of a consumer's score comes from their payment behavior.

Effects

Every delinquent payment affects a credit score, according to MyFico. Creditors also pay attention to late pays on credit reports because that often indicates a person is having trouble meeting financial obligations. Delinquent bills raise the possibility of defaulting on additional accounts or even filing bankruptcy. Lenders are reluctant to extend more credit to people who cannot pay their current bills. Some delinquencies can result in seizure of property if they happen on a secured loan. For example, the Federal Trade Commission (FTC) warns that most car loan contracts give lenders the power to take vehicle as soon as a late payment occurs.

Results

Creditors eventually write off delinquent accounts if the debtors never bring them current. This usually happens in six months, according to MSN Money columnist Liz Pulliam Weston. Charging them off does not mean that collection efforts cease or that a person is no longer responsible for the bill. The debt is often sold to collection agencies who pursue payment through various aggressive methods like frequent phone calls and letters or even legal action.

Time Frame

Delinquencies stay on credit reports for seven years, the FTC advises. Lenders see them for that entire time frame and may consider them in making credit decisions. Recent late payments or long stretches of slow bill payments are more serious than one or two delinquencies several years ago.

Prevention

Late payments are preventable through a strict budget and prompt payment of every bill. Mail delays can cause late payments, so set up electronic funds transfers instead. Holden Lewis of the Bankrate financial information site recommends asking credit card companies to change due dates if many bills fall due at the same time. Spreading payments throughout the month may reduce or eliminate delinquencies.

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Laws on Credit Ratings

Whether or not you pay your bills on time determines your credit score; your credit rating helps lenders decide whether they will conduct business with you. Credit ratings are governed by the federal Fair Credit Reporting Act. The three major credit reporting agencies operating in the United States are Equifax, Experian and TransUnion.

On-Time Accounts

If you pay your bills on time and keep an account open, the resulting positive account information reports indefinitely under the Fair Credit Reporting Act. Once you close the account, the positive credit rating lasts for at least 10 years. But just paying your bills on time isn't enough to secure a great credit score, warns Experian. People with on-time payments but high credit card balances might experience difficulty getting new credit.

Credit Problems

Most types of credit problems like late credit card payments or Chapter 13 bankruptcies reflect negatively on credit ratings for seven years from the date of the missed payment or bankruptcy filing. The same rule applies to any account, like an unpaid utility or medical bill, that is turned over to a collection agency. Chapter 7 bankruptcies and tax liens can legally harm credit ratings for 10 years from the date of the incident.

Inquiries

Every time you apply for credit, an inquiry is noted on your credit report. Collection agencies seeking payment also can legally access your credit reports. Excessive inquiries can legally harm your credit rating. Some lenders consider excessive inquiries indicative of financial problems. Some types of multiple credit report inquiries, such as those associated with shopping for an auto loan or a home loan, count as one in the eyes of lending representatives. Under the Fair Credit Reporting Act, inquiries posted to a credit report remain for two years from the date of the original application.

Disputing Errors

The Fair Credit Reporting Act demands that all Americans have an accurate credit record. If you see errors or outdated accounts on your credit reports, you should contact the creditor as well as the involved credit bureaus in writing. Send the letter through a traceable delivery method such as certified mail. The involved businesses have 30 days to complete an investigation into your dispute. If you cannot get satisfaction within about 45 days of issuing your initial dispute, then contact the Federal Trade Commission, a local consumer rights attorney or file a lawsuit in small claims court.

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What Is a Fair Credit Score?

What constitutes a fair credit score varies from one lender to another. One lender may grant credit to anyone with a credit score above 670 while another lender may use 690 as the cutoff score. Different credit situations may also have different requirements. For example, a mortgage loan might require a different score than an auto loan.

Types

There are two major types of credit scores, FICO and VantageScore. They have different ranges, so a fair score on one scale might be a poor score on the other.

FICO Scores

FICO credit scores range from 300 to 850; the higher the score the better. According to MyFICO.com, most lenders consider a score around 650 to be a fair score.

VantageScores

VantageScore credit scores range from 501 to 990; again, the higher the score the better. Scores in the 701 to 800 range are generally considered fair scores.

Considerations

Of the two types of credit scores, FICO scores are the most widely used and are the ones most familiar to the general public. Most people have a FICO credit score in the 600s or 700s.

Fun Fact

MyFICO.com reports that the average FICO credit score for people in the United States is 723.

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Help with a Credit Profile

The average American had a credit score of 692 in January 2011, with some areas of the country having average scores in the 670s, according to the Experian National Score Index. You need a score higher than the average to get a loan at the lowest rate. Most consumers can improve their credit profile on their own, but counseling could help. Just watch out for scams.

Who Can Help?

When debt becomes unmanageable or you cannot fix your credit on your own, consider going to a credit counselor from the National Foundation for Credit Counseling (see Resources). Do not expect a credit counselor to solve your financial woes. One-third of participants in a NFCC program only need one session to get back on track, one-third have problems beyond repair and one-third enter a long-term debt management program, but 45 percent of these people eventually drop out, according to MSN Money Central.

Credit Repair Scams

Debt negotiators sometimes lie or exaggerate how much they can help. They might advise people to stop paying bills to force creditors into negotiation. Going into default, however, could incur extra finance charges and fees and double or triple a person's outstanding debt. Also, creditors are not required to settle debt, but they usually report settled accounts to the credit rating agencies, which can destroy your credit as much as a bankruptcy. Not all debt settlement companies are bogus, but the Federal Trade Commission warns consumers to watch out for those that guarantee a settlement and/or want large monthly fees and percent of the money you save.

Do It Yourself

Credit counselors cannot offer information not already available for free. Start improving your credit profile immediately by paying bills when due. Automatic bill paying from your bank can help with this. Lower your debt obligations, starting with revolving credit card debt. Alternatively, you need to use some credit card debt for lenders to report to the credit bureaus, but use less than 30 percent of your limit. Review your report for any errors, such as accounts with an incorrect limit or negative items older than seven years that are not a bankruptcy.

Tip

Paying off an debt account in full is not always the wisest idea for a credit score. Installment loans "disappear" from a credit report once you pay them off and reduce the variety of loans you own. Credit card companies often reject applicants who pay off their balance in full every month, because the companies make no money on interest and it usually ends up costing the company in kickbacks.

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About New Credit Advice on FICO Forums

FICO Forums was developed by Fair Issac Corp., which owns the website myFICO (See Resources section). FICO Forums gives free access to anyone who chooses to participate in the forum and offer advice.

Who Publishes in FICO Forums

The FICO Forum website is for U.S. consumers to share their knowledge and experience with credit with one another. It was created to help educate consumers about credit.

Information in FICO Forums

FICO Forums include information on understanding your credit score, credit reporting, applying for credit, resolving financial difficulties, and other topics. FICO moderators monitor information in the forums to ensure that all participants provide advice that is legal and that they uphold ethical standards.

Benefits of FICO Forums

By educating yourself about credit, you can understand how your finances can be affected by good and bad credit. You can share experiences about credit with other consumers and obtain free advice on how to check your credit and improve your credit score.

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Which Factor Has the Largest Impact Percentage-Wise on Your Credit Score?

Credit scores are calculated by a company called Fair Isaac Corp.--which originated the scoring system--and the Equifax, TransUnion and Experian credit bureaus. The formulas are all similar, and the resulting three-digit numbers tell lenders whether you are statistically likely to pay your bills or default. Your scores come from five different categories of financing information, each of which has a certain percentage of influence on the final number.

Payments

Your payment history on your credit-related accounts has the largest impact percentage-wise on your credit score; FICO advises that it is 35 percent of the total number. Payment history includes monthly payments and related activities like charge-offs for bad debt, court judgments for unpaid bills and bankruptcy cases. On-time payments raise your score, but delinquencies and other negatives reduce it.

Debt

Your debt has nearly as much influence on your credit score as your payment history, accounting for 30 percent of the score. You get your best score when you keep your credit card balances under ten percent of your total available credit, according to MSN Money writer Liz Pulliam Weston. Your score does not take a major hit unless you spend more than 30 percent of your credit lines, and it improves once you pay the balances down.

Time Frame

Your credit-use time frame is not as important to your score as payments and debt load, but it does influence 15 percent of the number, FICO advises. Older accounts with long, positive histories are more helpful to your credit rating than new loans or credit cards, and several long-term accounts are better than one or two. Your credit cards fall off your credit reports in 10 years after you close them, and they do not have as much influence after closure as accounts with recent activity.

Credit

Your new credit accounts and the types of credit you use have a minor influence on your credit score, as each counts for 10 percent. These categories include new accounts for which you have applied, those for which you were approved and how many of your accounts are installment loans or revolving credit. Inquiries based on new applications are important in the new credit category because more than six unrelated credit checks made close together mark you as a high bankruptcy risk, FICO warns. Multiple inquiries generated by rate shopping for major loans like car or home financing count as just one credit check if they happen within 30 days.

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How to Raise a Poor Credit Score

Credit scores are indicative of your financial health at any given time. Credit scores change based on the amount of outstanding debt, your payment history, the types of credit listed on your report, the length of time you have been using credit and new credit inquiries. Poor credit scores can prevent you from obtaining a loan, increase your insurance rates or prevent you from getting a job. You can raise a poor credit score with attention to detail and by managing your credit accounts responsibly.

Instructions

1

Pay your bills on time. Payment history impacts your credit score by 35 percent. Payments within the past six months to one year impact credit scores more than older payments.

2

Pay any past-due bills to bring the account current. Collection accounts are the exception to this rule; collection accounts remain on your credit report for seven years, paid or not.

3

Maintain a low balance on credit cards. Outstanding debt can impact your credit score by 30 percent. Credit-to-debt ratio is part of the outstanding debt aspect of your credit score calculation. You can determine your credit-to-debt ratio by dividing the amount of debt you owe by the total available credit. For example, if you have $10,000 of available credit and owe $3,500 in debt against that credit, your credit-to-debt ratio is 35 percent.

4

Open a new credit card and make timely payments. Credit cards and other installment loans will raise a poor credit score if the accounts are managed responsibly.

5

Reactivate an old credit card with a purchase. Credit history is 15 percent of a credit score calculation. Old cards with no balance may not be reported to the credit bureaus as they are not active.

6

Dispute incorrect information on your credit report with all three credit bureaus. TransUnion, Equifax and Experian offer an online dispute alternative, or you can contact each agency in writing. Collections accounts can only be listed on your credit report for seven years, so pay attention to details. Disputing and removing negative information can improve a poor credit score.

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How Credit Scores Are Computed

Credit scores can control whether or not you get a loan and a credit card, but even the biggest experts in the field of credit scoring don't always agree on the value of the specific variables in the major credit scoring equation. If anyone knew the credit scoring formula, competitors could steal the FICO formula and make their own scoring system. Fortunately, we have a pretty good idea of how scores are computed.

Identification

The FICO score system is the most widely used in the consumer credit rating world, so the Fair Isaac Corporation keeps it secret to keep competitors from figuring out the secret to its accuracy and consistency. FICO does share the importance of certain categories. Debt levels, for example, counts for 35 percent of your score, while payment history accounts for 30 percent. However, there are several factors, such as the time since your last negative item, that give the FICO score its uniqueness.

Credit Scoring Software

Almost all creditors calculate a credit score using software from FICO that pulls your report and then runs the hard calculation. Thus, it is the responsibility of the lender to update its software to get the most current formula for calculating a score. As of 2011, the latest edition is FICO 8, which has important changes, such as ignoring collections worth less than $100 and taking it easy on the occasional missed payment.

Where Does the Information Come From?

You will probably get a different score from each credit reporting agency, because information gathering is more of an art form. The U.S. has three major bureaus that collect data from lenders and public databases, but even they often miss items, even important ones like a collection account. However, the bureaus tend to have the most complete information, so lenders usually pull a report from them and let the software use that data for the variables in the equation.

Tip

Although the FICO score is king, there are dozens of other formulas out there. Also, the FICO has modified formulas for certain demographic groups. For example, the FICO has a special formula that compares the borrower to other people with a bankruptcy, or consumers with a short credit history. Thus, it is better to pay bills when due and keep as little debt as possible rather than worry about any particular formula or score.

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How to Translate a Credit Score

Credit reports provide potential lenders with information about the risk associated with lending to a particular borrower. Checking your credit report is important because it verifies the information available to creditors. A free credit report is available once a year from three different companies: Equifax, Transunion, and Experion. The score ranges from 300 - 950 and is based on several factors. Each company provides different information but the basic layout is the same. With a quick overview, it is possible to translate this report into useful information.

Instructions

1

Order a credit report. A quick reference for ordering is listed below. The report includes the information from each of the three companies listed above. The credit score is listed as a number between 300 and 950. The scores are stratified into three groups: Prime, sub-prime and shafted.

2

Prime is any score above 680. A prime score means you won't have any problems getting a good interest rate on a loan or credit card.

3

Sub-prime is between 560 and 680 and means you will have a much higher interest rate on a loan or credit card.

4

Shafted is considered any score below 580. A credit score lower than this has several consequences. You can still get a credit card but you will have a high interest rate of 22 to 23 percent and you may have to pay fees and a down-payment. Most mortgages and loans will be unavailable with a shafted credit score. A low score can potentially increase your insurance rates.

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Importance of Establishing Good Credit

While it may seem like one three-digit number couldn't possibly have that large an impact on your life, if the number in question is a credit score, it definitely can. Your credit score, the overall rating of your creditworthiness, can play a part in determining everything from where you live to how much money you ultimately end up paying for financed items. To ensure that your credit leaves you with as many options as possible, and money in your pocket, dedicate yourself to establishing good credit.

Getting Approved

When you apply for credit, your credit rating is the first thing that lenders consult when determining whether or not to approve you. Having a poor credit rating can cause you to miss out on everything from that low-interest credit card in which you are interested to the mortgage that you need to make your dream home a reality.

Interest Rate Impact

The lower the interest rate you have on your credit accounts, the less money you ultimately end up paying for debt you accrue. By having good credit, you can qualify for the lowest possible interest rates. If you receive a credit card when your credit rating is good, but you later falter, you may find that card's interest rate hiked, as many lenders reserve the right to increase interest rates if payment-related issues arise.

Acquiring Insurance

Creditors are not the only ones who check your credit rating. Insurance companies also look at this information when deciding whether or not to extend you insurance. If your credit is poor, you may be seen as too significant a risk and insurers may not be willing to even insure you.

Getting a Phone

A cell phone may seem like a simple thing to acquire, but if your credit needs some rehab, it could prove anything but. Nearly all cell phone companies check customers' credit histories before approving them for cell phone plans. If your credit is poor, you may be required to secure a co-signer to qualify for cell phone service, or you may not even be able to acquire a contract at all and, instead, be forced to go with a pre-paid account.

Setting up House

The ability to get a mortgage isn't the only housing-related issue upon which a poor credit score can have an impact. Many landlords pull credit reports to determine potential tenants' creditworthiness before approving them for an apartment or home rental. If your credit is poor, you might have a harder time finding housing, even if you wish to rent, not buy.

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Does Negative Credit Fall Off Your Credit Within Seven Years?

Most negative information drops off your credit report after seven years. However, bankruptcies remain 10 years, and some negative information may remain forever. To verify the information in your report, review your credit reports at least annually. Scrutinize your report carefully to ensure that the report is accurate.

Credit Card

Negative credit card information stays on your credit report for seven years. The seven-year time frame begins on the date that the account first become delinquent. Negative information may include late payments and charge-offs. A charge-off occurs when a creditor decides that you are not going to pay your debt, so it charges the debt off.

Bankruptcy

Bankruptcy will stay on your credit report for 10 years, according to the Federal Trade Commission. If a bankruptcy is still appearing on your credit report beyond 10 years, send a dispute letter to each of the credit reporting agencies to request that the bankruptcy be removed from your credit report.

Other Negative Information

The Federal Trade Commission reports that some negative information may stay on your credit report indefinitely. Such information may include details pertaining to criminal convictions, information generated when you apply for a job earning more than $75,000 per year, and information concerning any applications for more then $150,000 worth of life insurance or credit.

Disputes

If you have negative information on your credit report that is either inaccurate or is older than seven years, you can dispute the information. To dispute items, contact each of the three credit reporting agencies in writing. Enclose copies of any evidence that supports your dispute.

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Does a Small Claims Court Judgment Go On Your Credit?

A small claims court judgment against you is recorded on your credit report. These civil judgments are automatically sent to all three credit bureaus and often result in significant negatives on your credit report. Civil judgments will remain in the public records section of your credit report for at least 7 years --- after the judgment, not the date of the debt.

Credit Bureaus Get Public Information

The courts do not need to specifically report to the three credit bureaus. Since civil judgments are public records, the credit bureaus can assemble their own data on small claims dockets. Unfortunately, the debtor often must update his records to prove that the outstanding debt has been paid. A paid judgment, while still a strong detriment, is much better than an unpaid debt.

Credit Report Damage

Small claims judgments usually damage credit reports in multiple ways. First, a negative public record, resulting from a civil judgment, is among the most negative comments on a credit file. Second, if the law suit and judgment result from a reported delinquent credit account, negative information about that account often remains in the file, adding another damaging entry. Should the debtor not appear at trial date, the court enters a "default judgment" in the record. Default judgments are even more damaging as it appears that the debtor didn't even bother to attend the trial.

Statute of Limitations

The statute of limitations (SOL) can be important in small claims actions --- or the avoidance thereof. Unfortunately, the SOL can be long --- even 12 to 20 years. Sometimes, however, the SOL can be renewed, starting the "clock" over from the beginning. However, if you are sued for an old debt, it is worth checking the SOL in your state. Should a legal action be initiated after the expiration date, you can advise the court and have the suit dismissed.

Default Judgments

Avoid default judgments. Even if you owe the money claimed, the SOL has not expired, and you cannot pay the monies due in full, you should attempt to settle the issue. This will avoid trial and a small claims judgment posted on your credit report. Remember, the plaintiff --- creditor --- does not care about your credit report. The creditor only wants monies due. You can probably work out a settlement prior to trial. If you owe the monies claimed and neglect to appear at trial, your credit report will be damaged for many years in the future.

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Advantages & Disadvantages of Credit Reports

Understanding your credit, or the credit history of someone you or your business considers lending money to, is essential to making good borrowing and lending decisions. Credit monitoring agencies are private organizations that collect information about how and when individuals borrow money and compile it into documents known as credit reports. Credit reports are valuable resources, but can also serve as obstacles for borrowers.

Credit Monitoring

Credit reports give consumers an accurate, convenient way to monitor their own credit. The federal government requires each of the three major credit monitoring agencies to provide one free credit report to each consumer who requests it once a year. By checking your own credit report on a regular basis, you can check for inaccuracies or suspicious activity that can help you identify cases of identity theft or credit fraud. Catching such activity early makes it easier to resolve, and knowing that your credit report is in order gives you the confidence to apply for a loan.

Gauging Credit Worthiness

For lenders, credit reports have the advantage of bringing together many pieces of financial data for a given borrower. This allows lenders to gauge a borrower's credit worthiness and evaluate the risk of making a specific loan. Credit reports contain information on past loans, any late or missed payments, available credit from other lenders and debt obligations. Without this information, lenders wouldn't be able to offer interest rates that reflect a borrower's likely risk or determine loan amounts as easily.

Cost

Beyond the annual free credit report, consumers must pay for additional copies of their credit reports. This means that anyone who experiences identity theft or credit fraud within a year of requesting a free report needs to pay to check the damage or confirm that their credit histories are accurate. Lenders also need to pay when they request credit reports, which is a cost they often pass on to loan applicants. Credit reports do not include credit scores, which are the three-digit numbers that summarize credit worthiness; credit reporting agencies charge for credit scores as well.

Difficulty of Repair

Credit reports are useful documents, but they take time to change and repair. While a major event such as a foreclosure or bankruptcy can significantly impair an individual's credit report, it can take years of on-time payments to undo the damage. Some items, including bankruptcy, remain on a credit report for up to 10 years. This means that lenders see a borrower's distant credit history as well as their more recent behavior, and misjudgments from the past can have long-lasting consequences.

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What Lowers Your Credit Score

When you purchase a vehicle or buy a home, a lender will request a credit score to determine your creditworthiness. A high credit score will yield lower interest rates and lower payments. A low credit score, on the other hand, will yield high interest rates and payments.There are many factors that contribute to having a low credit score. Being aware of these factors can make the difference in your finances.

Making Late Payments

Payment history accounts for 35 percent of your credit history. Thus, making late payments and having collection accounts on your credit report can negatively impact your credit score.

Maxing Out Your Credit Cards

Because 30 percent of your credit score is dedicated to the amount of outstanding debt, having a high ratio of credit used versus credit available has a negative impact on your credit score.

Closing Credit Card Accounts

The length of your credit history accounts for 15 percent of your credit score. Therefore, closing credit card accounts, especially accounts that have been open for years, can lower your credit score.

Applying for Unnecessary Credit

New credit accounts for 10 percent of your credit score, so applying for unnecessary credit causes credit inquires that negatively impact your credit score.

Not Having a Variety of Credit

Because 10 percent of your credit score is based on the types of credit used, having too many department store cards and not having installment loans or automobile loans can lower your credit score.

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Can You Repair Your Credit?

Your credit score and history bears great influence on your life, affecting your ability to buy a home, obtain a loan, enter into a cell phone contract, purchase auto insurance and even get a job. When you suffer a financial hardship that results in detriment to your credit, all is not loss. With time and responsible use of credit, you can rebuild your credit score and bounce back from financial disaster.

Your Rights

You have a right to inspect your credit report as often as you would like, and the law allows you access to one free copy of your report from each of the three major credit bureaus every 12 months. If you find discrepancies on your report, you have the right to dispute information you believe to be false by writing to the credit bureaus with supporting information of your dispute. The credit bureaus will investigate your claims within 30 days and make a decision as to whether the claim is legitimate and whether to remove the information from your credit report. You may also write to your creditor to dispute inaccurate information reported on your credit file.

Warning

You may find success in rebuilding your credit by seeking the help of a third-party credit repair company. However, the Federal Trade Commission warns that doing so may make you the target of credit repair scams. The Credit Repair Organizations Act limits the power of credit repair companies, keeping them from charging you a fee until you receive the services you are promised. The law also prohibits a credit repair company from making false claims or beginning the credit repair process until three days after you sign a contract with the company. Despite these rules, many people still fall victim to credit repair scams each year. To avoid being victimized, research your credit repair company with the Better Business Bureau and your state's Attorney General's Office.

Secured Credit Cards

A bad credit score can prevent you from obtaining credit, thus inhibiting your attempts to rebuild your credit history. Fortunately, many credit card companies offer secured credit cards to consumers with poor credit histories. Secured cards work similarly to traditional credit cards, with one exception: collateral. Before opening a secured credit card, you must provide a cash deposit to protect the creditor in case you default on your credit card. However, with regular and responsible use of a secured card, you can rebuild your credit and eventually qualify for unsecured lines of credit and installment loans.

Timeline

If you do nothing else to improve your credit score but pay your bills on time and avoid future negative reporting, your credit score will improve over time. As negative items on your report age, they become less important to your credit score, and newer items begin to carry more weight. After seven years, the negative items on your report will fall off, with the exception of bankruptcy, which may remain on your credit report for a full decade.

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Government Laws on Free FICO Scores

Checking your credit report annually can save you from a mountain of financial troubles. Not only does it show you what creditors see when you apply for credit, but it helps you spot suspicious activity on your credit accounts. The Federal Trade Commission recognizes these benefits, which is why it allows you to check your credit report for free every year. Unfortunately, this doesn't include free access to your credit score.

Fair Credit Reporting Act

Under the Fair Credit Reporting Act, you may access your credit report for free once every 12 months through AnnualCreditReport.com (see Resources). This is the only site the FTC endorses to provide free credit reports. AnnualCreditReport.com allows you to see your credit report from each of the nation's leading reporting agencies --- Experian, TransUnion and Equifax --- but not to see your credit scores from these agencies. For that, you must purchase your score from the agencies themselves.

Accessing Your Score

As of 2011, it costs at least $10 to see your credit score from one agency. Experian lets you see your score from all three agencies for about $40, while you can get your FICO credit score from myFICO.com for about $20. Your credit score can vary as much as 40 points between agencies according to TrueCredit.com, which is sponsored by TransUnion.

Improving Your Score

Since they use the information on your credit report to assign your credit score, agencies don't show you your score without also showing you your report. By reviewing your account, you can determine whether or not you should improve your credit habits. The single most damaging thing you can do to your credit is to make late payments. The most damaging thing next to this is to have a high debt-to-credit ratio.

If your score is 720 or higher, it doesn't need improvement. According to CBS's "The Early Show," creditors consider scores from 720 to 850 to be the same. If it's below 700, work to improve it.

Reporting False Information

You may improve your credit score by having false information removed from your report. Such information may include misspelling of your name or a credit card account you never had, for example. Call the agency responsible if you find false information. Even if it doesn't improve your score, ensuring that your information is correct can help combat identity theft.

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Why Is a Credit Report Important?

A credit report is important for a number of reasons. When you make purchases by credit, your payment history is reported to the three major credit reporting agencies. Many companies will review your credit history to determine if they want to do business with you.

Mortgage Loans

If you have a credit report with bad credit, you may have to pay a higher interest rate for a mortgage loan, which can cost you thousands of dollars in finance charges over the life of the loan.

Employment

Some employers will review your credit report before they decide to hire you. A bad credit report can disqualify you from employment consideration.

Car Insurance

Your car insurance premiums can increase if you have bad credit. Some insurance companies will review your credit report when it's time to renew your policy.

Universal Default

If you are late on a credit card account, your other credit cards, which you have with other companies, may decide to increase your interest rate, lower your credit limit or even close your account. This is called the universal default clause.

Renting

If your credit report is in bad shape it may be difficult to find housing. An apartment complex may decide against renting to you based on your credit report.

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Do Landlords Report Tenant Payment History to Credit Bureaus?

For years, rental history never appeared on a credit report, because the credit bureaus did not find data from private leasers reliable or available for all consumers. In 2010, your rental history can appear on the reports of some credit rating companies, but this is the exception rather than the rule. Even if your rent does not appear on your report, it can still make you creditworthy.

Identification

Landlords cannot report directly to the credit bureaus, but they often report to companies that collect rental histories. In 2009, Experian, one of three major credit reporting companies, acquired RentBureau and began incorporating that data into credit reports. Also, the Fair Isaac Corporation, which holds the patent on the scoring model used by the major bureaus, purchased PRBC, a consumer credit rating company that uses nontraditional payment data such as rent for its FICO Expansion score.

Considerations

As of 2010, Experian only reports tenant payment history for its proprietary alternative score, because tenant payment history is not uniformly available. In the future, landlords might be able to report to the credit bureaus, but only if reporting costs come down. Creditors must invest in a substantial amount of technology to accurately report data and labor to meet the guidelines required of a credit agency. Usually, this is too expensive except for very large rental properties.

Considerations

Another reason reason credit bureaus do not accept payment history from landlords is the credit bureaus are not sure how useful it is as of 2010. Renting an apartment is not like having an open line of credit. The major credit bureaus, such as Experian, believe that rental history can accurately predict the chance of someone defaulting on a loan, so they actively compile data trying to prove this.

Tip

Your landlord might report your payment history to one of the rental history agencies, such as PRBC, so it is a good to pay rent on time anyway. Also, landlords often ask for the contact information of previous landlords, which could determine whether they approve your application. If you have no credit history, Kiplinger suggests applying for a secured credit card with no setup fee to build credit. These require a payment equivalent to the credit limit, but can become unsecured cards after several months of on-time payments.

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How to Clean Your Credit the Legal Way

Before heading to a car dealership, mortgage lending office or employment line, clean up old, inaccurate and incomplete credit information from your credit report. A good credit rating can qualify you for lower interest rates, more attractive loan products and higher paying jobs. While not all employers consider an applicant's credit history when making employment decisions, many do. Clean up your credit using several effective credit repair tips.

Instructions

1

Request, view and print your credit reports. Go to Annual Credit Report's website where you can request, view and print one free credit report from each of the three nationwide credit reporting bureaus. Enter your full name, state of residence, Social Security number and date of birth.

2

Clean up incorrect or incomplete credit information. File an online dispute form to clean up incorrect information on your credit reports. Enter the name of the lender or creditor, the credit type (i.e., student loan, line of credit or bank loan) and account number. Briefly explain why the information is incorrect or incomplete.

3

Clean up out-of-date credit information. Look for adverse information that's more than seven years old; bankruptcies reported more than ten years after the date of the last activity; and credit inquiries more than two years old, according to NoLo, a website dedicated to providing legal information to families and businesses. Submit an electronic request to remove the out-of-date information from your credit report.

4

Settle past due or delinquent accounts. Past due and delinquent accounts adversely affect your credit rating. If you cannot pay down a past due account, settle the debt for a lesser amount. As a general rule of thumb, the longer an account is delinquent, the more likely a lender will accept a lump sum pay-off for less than the balance. Start your negotiations low and work your way up to an amount you can reasonably afford. Negotiate for the best final credit rating, including removing charge-offs from your credit report. "Paid as agreed" would be the best outcome.

5

Restore your credit. Pay down lines of credit on time each month. As a general rule of thumb, pay down credit lines to within 30 percent or less of your credit limit to maintain a low card utilization rate. A high card utilization rate suggests a weak financial standing.

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How to Do a Credit Score Check Without a Computer

AnnualCreditReport.com is the official source for getting your free credit report, but it isn't the only option if you want your credit score, but don't have access to a computer. You can contact the credit bureaus directly by phone to request a copy of the report and credit score. Each citizen is entitled to one free credit report each year, but to see your credit score, you'll have to pay a small fee, usually less than $10.

Instructions

1

Call the credit bureau. You can contact just one of the credit bureaus or you can contact all three of them. If you want a credit report from all three, you'll have to pay each of them the required fee. The numbers are as follows:

TransUnion
800-888-4213

Experian
888-397-3742

Equifax
800-685-1111

2

Verify your identity. When you call the number, you'll have to provide your name and Social Security number and information that can identify you, such as your past addresses.

3

Pay the required fees. You can do this by credit card when you make your request.

4

Wait to receive your credit report and score in the mail. It can take up to four weeks.

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How to Check Credit History

Knowing what's on your credit report is important and can determine how informed you are about your credit history. Checking your credit history and being sure that your payment history is accurately reported is moderately easy and can be accomplished in a matter of minutes.
There are three credit reporting bureaus. Each collects and maintains your credit history. Other sites allow you to gain access to your credit report, but these services can only link back to the credit-report history that is provided by the three credit-reporting bureaus. Creditors only report to TransUnion, Experian, and Equifax; no other consumer credit-reporting bureaus or agencies exist. Other services simply gain access to your credit report through these service centers or link back to their official websites.
Here are the most reliable ways to check your credit history.

Instructions

1

Receive a free credit report under the FACT ACT. U.S. consumers are entitled to one free credit report yearly from each of the three credit-reporting bureaus, TransUnion, Experian and Equifax. Visit the Annual Credit Report website for access to your free credit report. (See Resources below.) This option is only available once per year, so if you require additional credit reports, you will need to sign up for a month-to-month service or pay a one-time fee for a new credit report.

2

Visit the TransUnion website (see Resources). Order a credit report and view your credit history online within minutes. Sign up for a free 30-day trial by clicking on the appropriate link. Paid members should click the "Member Login" link to enter the site.
First-time visitors to the site can sign up for the free trial period and gain immediate access to their credit report for 30 days. The service is provided to consumers who are unfamiliar with TransUnion credit-report products, or have never accessed their credit report and want to preview the report before paying for a credit report or credit -score product. The free trial will allow new members to view their complete credit report and dispute any incorrect information. Unless the trial includes access to your credit score, this service will require an additional fee or separate trial offer.

3

Visit the Experian website and click on the "Personal Services" link. View your credit history by purchasing a credit-report product or signing up for a free trial membership with Experian. Check your credit history within minutes and see who has accessed your credit report. The free trial membership will allow you to immediately access your credit report, see who has viewed your credit report and dispute any fraudulent or incorrect information.

4

Visit the Equifax website and browse Equifax products such as Credit Watch Gold or Score Watch; both can be purchased online respectively for $9.95. These and other Equifax products can be purchased online and will allow you to gain access to your credit history. Once your payment is processed, you will use a self-assigned user name and password to view your credit report and verify your complete credit history.

5

Compare credit-report packages and credit-score products across various websites. Check your credit history online through TrueCredit, My FiCO or Credit websites. The three credit-reporting bureaus and other websites that offer access to your credit history require a fee. Most offer free promotional trial offers, but these are marketing tools used to attract new members. Again, the only way to obtain a free credit report is through the Annual Credit Report website.

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The Credit Score Required to Buy a Car

Unless you have the necessary cash to purchase a car, you're going to need to finance the vehicle of your choice. If you haven't done a lot of car shopping in your life, you may be wondering what credit score you need to secure an auto loan. There are a lot of factors that come into play when applying for an auto loan, and there's no magic credit score that will get you approved.

Range of Credit Scores

The terms "Good credit" and "Poor credit" don't really mean anything if you have no idea what constitutes as good and poor credit. A credit rating of 740 and above is considered excellent, a score of 650 to 730 is considered very good, while a score of 620 to 640 is considered good and anything below 600 is considered poor. Excellent credit scores always get you the best terms and poor scores get you the worst.

Guaranteed Credit Approval

Some dealers promote guaranteed financing, and it's true that you're guaranteed to get financed for a car, even if you have a 350 credit rating, but only if you meet the requirements. Most guaranteed credit approval advertisements make it appear that you can walk into a dealership, ask for a loan and receive it, but that's not true. Any dealer who advertises guaranteed credit approval works with subprime lenders, which are lenders who work with borrowers with poor credit scores. Subprime lenders always require a down payment, and generally the down payment increases with a lower credit rating. Subprime lenders also require proof of income and proof of residence. Your interest rates are always higher with subprime lenders as well.

Dealer vs. Bank Financing

Your credit rating may be less of importance if you try to qualify for a loan through your bank or credit union. Your financial institution is usually willing to work with you, since you are a member and have a history with the institution. A credit score of 600 may get you a loan through your bank, but it might not get you a loan through the financial institutions that the dealership goes through. The interest rate is usually lower if you go through your bank or credit union, because dealers take a cut on all financing deals they land, according to Edmunds.com.

Terms of the Loan

It's not so much of whether you can get a car based on your credit score as much as it is what kind of loan you can get with your credit score. Unless your credit rating is abysmally poor, such as 350, you'll probably be able to land a loan if you look around long enough. Your credit score mainly affects what kind of loan you can qualify for. Only excellent credit scores can qualify for a zero percent APR interest rate, for example, while a credit score of 620 may get you a loan with a 10 percent interest rate.

Co-signer

Your credit rating becomes even less of an issue if you have a co-signer who has a good credit rating. A co-signer is someone who agrees to take on the loan should you fail to make the monthly payments. Financial institutions almost always approve you for a loan if you have a co-signer that has established credit and a good credit score. A co-signer is taking a risk, however, because if you don't repay the loan, then that responsibility falls to the co-signer; so be sure that you can repay the loan when you ask someone to co-sign for you.

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Tips on Boosting a Credit Score

Your credit score is determined by proprietary formulas developed by the FICO scoring company and the credit bureaus. The My FICO website explains that certain factors affect the calculation. Boost your score by concentrating on the most heavily weighed factors. Your credit reports, from which scoring information is obtained, will reflect your efforts.

Pay Bills on Time

Your payment history on your credit reports shows whether you pay bills by the due dates and any delinquency period when you are late. The My FICO site advises that 35 percent of your credit score results from this information. Budget to ensure you have enough money for at least the minimum payment on all of your accounts. Set up electronic payments, if possible, so the funds always arrive on or before the due date. Otherwise, mail them early.

Reduce Debt

Your debt load is the second most important factor in your FICO score, according to My FICO. It makes up 30 percent of the score. Lenders like to see you actively using credit, but they will not open new accounts if you owe too much to existing creditors. Your balances do not go down much if you only pay the bare minimums. Cut out optional purchases and expenses and redistribute the money to your highest interest accounts. The federal Credit CARD Act makes credit card companies spell out how long it would take you to pay off your accounts by only paying the minimums, according to the Board of Governors of the Federal Reserve System website. Use this information as a guide for where to channel the extra funds for the most impact.

Maintain Old Accounts

Keep your oldest credit card accounts open and in good standing. Fifteen percent of your credit score results from how long you have used credit. Closing old accounts hurts this area. Leave them open and use them occasionally so your bank does not cancel them for inactivity. The law forbids card issuers to charge inactivity fees, but they can close accounts for non-use.

Maintain Accurate Reports

Credit scorers depend on the information on your credit reports for their calculations. Wrong information affects your score and negative entries lower it. The Federal Trade Commission explains that you can legally dispute mistakes, which forces the credit bureaus to verify or delete the data. Get no-cost credit reports from Annualcreditreport.com and review them for accuracy. Report mistakes through the online dispute forms on the bureau website. Your credit score gets a boost once the bureau fixes or removes the incorrect, negative entries.

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How to Dispute Credit Report Entries

Having good credit determines if you will have the ability to buy a home or purchase a car at an affordable price. The interest rate on items you buy on credit is affected by your credit score. The lower your score, the more you pay in the long run. Negative entries on your credit report decrease your score and make you look like a bad credit risk. Check your credit report regularly to ensure all the accounts are accurate. If you find inaccuracies, you have a right to dispute them with the three credit reporting bureaus.

Instructions

1

Dispute inaccuracies online by accessing the website of each credit bureau-- Equifax, Experian and TransUnion--and entering facts on why you are disputing a particular account. On the Experian homepage, click "How to Dispute Your Credit Report." On the Equifax homepage, click "Correct Errors," and on the homepage for Transunion, look under Consumer Assistance and click "Dispute an Item."

2

Write a statement of dispute, and ask that this dispute statement be attached to your credit report whenever it is ordered by someone, for example, a potential employer or creditor. The dispute statement explains why a negative item is on your report. For Equifax and Experian, submit a consumer dispute statement of 100 words or less to each bureau in writing. For Transunion, you may call 1-800-916-8800, to receive assistance in writing a dispute statement.

3

Write a letter to the creditor of the disputed amount. Tell the creditor that you are disputing the account in question, and ask that they verify the accuracy of the account. Submit all copies of documents that support your position, such as "paid in full" receipts or canceled checks.

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Will IRS Delinquency Affect a Credit Score?

The Internal Revenue Service is charged with collecting taxes on behalf of the federal government. Filers are expected to pay any taxes owed. Failure to do so can lead to the IRS taking legal action against you.

Identification

If you're delinquent on taxes owed to the Internal Revenue Service, the IRS can file a tax lien against you. These liens are reported to the credit bureau and will appear on your credit report as a public record.

Effects

Your credit score is based upon information in your credit report. Once a tax lien is placed on your report, it will drop your score significantly. How much of a drop depends upon the other information contained within your report. Keep in mind that 35 percent of your FICO score reflects how well you pay your bills, including late pays, judgments, bankruptcy and tax liens. A tax lien may also prevent lenders from approving a loan for you.

Misconceptions

According to MyFico, an unpaid tax lien can stay on your credit report indefinitely, depending upon what state you live in. Even if you pay the tax lien, the bureau will not remove it. It will remain there for up to seven years from the date it was paid.

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How to Monitor All Three Credit Bureaus

You have two choices for ways to monitor all three credit bureaus (TransUnion, Equifax and Experian). You can choose to subscribe to a monthly monitoring service such as CreditReport.com that monitors your credit for you. Your second option is to pull your credit reports from each agency, for free, and complete an annual check-up of your credit. The main difference is that the monitoring service alerts you to any changes to your credit reports immediately by sending you an email or message in the mail. If something changes on your credit report and you're manually monitoring it, you'll only know once a year when you check the reports.

Instructions

Monitoring Service

1

Choose a monitoring service. There are multiple monitoring exists from which to choose. All three credit agencies also offer this service, which is a three-in-one monitoring service. Fees for these types of services start at $9.95 per month. Compare and contrast the features that each service offers and choose the most cost-effective one that provides the most important features to you.

2

Register for an account. Once you choose a monitoring service you have to provide all of your personal contact information, including your full name, address, phone number and Social Security number. The service will also ask for an email address if you want to receive alerts via email. Some services offer a text alert service, so you will also need to provide your cell phone number if this is how you want to receive updates.

3

Pay for service. You must provide a debit or credit card number when you register for the account to pay the monitoring service's monthly fee.

4

Review alerts. When any changes are made to any of the three credit reports, you will receive an alert. The alert lets you know that something has changed on your credit report and it provides an online link to review the change. If the change is correct or positive then no action is required on your part. If the change is negative or inaccurate, follow the dispute instructions listed for each credit agency to initiate a dispute.

Manual Monitoring

5

Request a copy of each credit report. Contact each of the three credit reporting agencies to request a free copy of your credit report.

6

Review the reports. Go line-by-line and carefully review the information listed on the report for accuracy.

7

Dispute or adjust incorrect items. For inaccurate items, follow the instructions on the credit report to initiate the dispute process on the items that are inaccurate.

8

Correct accurate but negative items. In order to improve your credit, contact the creditor and try to make payment arrangements or come to an agreement on clearing up blemishes on your credit.

9

Repeat. Once a year, repeat steps one through four.

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