Your Credit Reports and Credit Scores: Simple Steps to Make Them Better
It is no secret that the information in your credit report may be used to help determine whether or not you will get a loan and how much you will pay for it — and perhaps even the cost of your insurance or if you can get a new job or apartment. But how much do you really know about credit reports and credit scores and how to improve them?
"In a difficult economy, it's critical to know what's on your credit reports and why, and it's especially important to know how to rebuild a credit history after a financial setback," said Luke W. Reynolds, Chief of the FDIC's Outreach and Program Development Section. Here are several tips.
Review your credit reports for inaccurate information. You can request a free copy of your credit report from each of the three major credit bureaus — Equifax, Experian and TransUnion — once every 12 months, as well as under certain other circumstances, such as if you've been denied credit or employment based on your credit report or if you believe you may be a fraud victim.
To order your free annual report from any of those three companies, there is only one place to go: visit www.AnnualCreditReport.com or call toll-free 1-877-322-8228. Remember to review each report carefully, as the information in your file at each bureau may vary. And, if you receive a notice that a lender or another entity used a credit report from a company other than one of these three credit bureaus, request your free copy from that bureau, too.
Once you obtain your report, review it for any inaccurate information and, if you find any, follow the procedures outlined by the credit bureau for disputing the information. "While you should review your credit report regularly, it is particularly important to make sure your credit report is accurate before you apply for a loan because the information in your credit report will determine your credit score," Reynolds explained.
Know your credit score. Your credit score is a number that is developed by a computer model based exclusively on the information in your credit report. It is intended to predict, for example, how likely you are to repay your debts. Keep in mind that credit scores may vary depending on which scoring services prepared them and which of the many different credit scoring models is being used.
If you are interested in knowing your credit score, you can order one for a small fee from a number of outlets, most of them accessible online. When doing so, though, think carefully before signing up for a subscription to additional services, which can be costly.
If a lender uses a credit score to help set material terms (such as the interest rate) on your loan or credit card, the lender, in most cases, must inform you of the score and related information free of charge. The lender also must provide similar information if the score is used in a decision to deny credit.
Understand what factors are likely to influence your score. For most major scoring models, whether you repay loans as agreed (on time) is generally the most significant factor influencing your score. That's why it is important to pay your bills on time.
Another key component of your credit score is how much you currently owe on each account compared to its original loan amount or credit limit. Additional factors include how long you have had your current loans and credit cards, the types of credit accounts you have, and how many recent "credit inquiries" you have (these are requests by lenders for your credit report or score in response to your applications for new credit).
Recent changes in one major scoring model also suggest that how close you are to your credit limit on your credit card may have more of an effect on your credit score than in past years, while changes in another major scoring model suggest that credit inquiries may hurt you more now than in the past.
Contrary to common misconceptions, though, your credit score will not be lowered when you order your own credit report.
Understand how to improve your credit reports and scores. In addition to ensuring that your credit reports are accurate, consider the following:
Pay your loans and other bills on time. Even if you fell into trouble in the past, you can rebuild your credit history by beginning to make payments as agreed. Paying your debts on time will have a positive effect on your credit score and can improve your access to credit. So, don't pay a fee to a company that promises to "clean up" your credit record for a fee.
To help show that you are not overextending on debt, try to minimize how much you owe in relation to your credit limit. Joni Creamean, Chief of the FDIC's Consumer Response Center, suggested one strategy for achieving that goal. "Don't automatically close accounts that have been paid in full and haven't been used for a while," she said, "because that can lower your available credit and make the ratio of credit used to credit available worse. The exception is an account that continues to be assessed monthly fees even with a zero balance."
If you believe you cannot repay your creditors, contact them immediately and explain your situation. Ask about renegotiating the terms of your loan, including the amount you repay. Reputable credit counseling organizations also can help you develop a personalized plan to solve your money problems, but less-reputable providers offer questionable or expensive services or make unsubstantiated claims.
For more information on credit reports and credit scores, plus guidance on choosing a credit counselor, go to www.mymoney.gov and search by topic.