10 Facts About Credit Scores and Credit Reports


These ten facts about credit scores answer the following questions: What is a credit score? How do I improve my credit score? What’s the difference between a credit score and a credit report?

“Before taking action that might hurt or help your credit score, check your facts to be sure you’re actually helping your financial picture,” says Ethan Ewing, CEO of Bills.com.

For more in-depth financial information, click Your Credit Score: How to Fix, Improve, and Protect the 3-Digit Number That Shapes Your Financial Future by Liz Pulliam Weston. And, read on for Ewings facts about credit scores and achieving your financial goals…





10 Facts About Credit Scores and Credit Reports

1. A credit score is NOT a credit report. A credit report is a detailed listing of all debts and payments, going back throughout an individual’s entire payment history. For each entry, it shows the creditor’s name, amount owed, the highest balance owed, the available credit, whether the account is open or closed (and who closed it), the
number of late payments and whether the account is in default.

A credit score is a number between 300 and 850 that is based on complex formulas incorporating all the data in the credit report.

2. Even if you’re not in default you need to check your credit report!  Everyone should check his or her credit report at least once a year (or even quarterly) to be sure the report contains no erroneous information. Visit AnnualCreditReport.com for a free, no-obligation copy of the report.

3. Checking your credit report does NOT damage credit. “Reviewing your own credit information has no effect on a credit score,” says Ewing. “Neither does a credit report review by a prospective landlord or employer.”

4. You have more than one credit score. The data compiled by three different credit scoring agencies (Equifax, Experian and TransUnion) form the basis for three different credit score calculations. The resulting scores might vary slightly among the three agencies if they have slightly different information, but they will be similar.

5. Married couples do NOT share a credit score. If all of a couple’s accounts are joint, their scores will likely be similar, but each individual maintains a unique credit record and credit score. On the flip side, after a divorce, ex-spouses need to follow protocol to have creditors remove either party from a joint account.

Read 8 Money Management Tips for Couples — it could help prevent money fights!



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6. Shopping for a loan does NOT destroy credit. It is true that “hard inquiries” — examinations of a credit score in preparation for extending credit — can have a small negative impact on credit. However, credit bureaus take into account that consumers might inquire about a loan from multiple mortgage companies or auto lenders. “If multiple inquiries are received from the same type of lender within a 14-day period, the credit scoring companies do not count each inquiry against the borrower,” Ewing says. “But, credit card account inquiries to open new accounts are counted individually.”

7. You don’t need to cancel old credit card accounts to improve your credit score. An important component of a credit score is available credit, or the unused credit that has been offered (on a credit card, for instance) but not used. Closing unused credit cards removes those available balances from the equation and can actually lower a credit score.

8. You can’t improve your credit score simply by paying off bills quickly. Credit scores reflect performance over time, so scores won’t change overnight.

9. Credit vendors can’t improve bad credit scores. Again, credit scores show historic behavior. Be cautious about companies that claim to “fix” or “repair” credit. “You yourself can remove inaccurate information,” Ewing says. “Beyond that, be aware that some companies send credit scorers a deluge of letters asking that they verify — and in the process, remove — all past negative information. If and when truthful information is verified, however, it will quickly return to the credit report.”

10. Get help if you need it, though it may not improve your credit score. Credit counseling, debt settlement and financial bankruptcy all can cause significant black marks on a credit report. “If you are in real trouble, however, you can and should seek help,” Ewing says. “Credit counseling can help to manage bills, and lower interest rates and monthly payments to creditors. Debt settlement firms can negotiate to lower the principal amount of your debts, typically providing a faster path to debt freedom than credit counseling. Bankruptcy should be discussed with a bankruptcy attorney.”

If you have any questions about these facts about credit scores, please ask below! I also welcome your tips for improving credit scores….





xo


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7 thoughts on “10 Facts About Credit Scores and Credit Reports

  • Charlene McNary

    A few things to consider:

    1) Credit scores are critical for more than obtaining credit. Many companies: auto insurance, home insurance, alarm system providers, etc are increasingly using credit scores as a component in their pricing for their services. Many people do not realize it but a low credit score or no credit score can disqualify you from receiving some of the incentives frequently promoted by alarm companies and cable companies.

    2) Closing accounts does not only impact your credit available ratio but also the component of your score determined by how long you’ve had credit. Close the credit card you’ve had the longest and you can see your score take a dive.

    Credit scores are meant to indicate how well you MANAGE debt not how well you stay out of debt.

  • Ethan Ewing

    Duane, what I meant by leaving accounts open is that if you have a certain amount of debt outstanding, closing some of the cards may increase your available credit to debt ratio, the lower this number, the better for you. If you do not have any outstanding debt, then this would not apply to you.

    A big part of your FICO credit score (about 30%) is determined by the ratio of how much you owe to how much credit you have available. The lower the ratio, the higher your score. The more you have available and unused, the lower your ratio will be. Apparently, it is a good sign if you can responsibly handle a high credit limit.

    The purpose of a credit score is to gauge your ability to repay the money that is lent to you. If you do not need any credit, then you need not bother about your score.

  • Danny Kofke

    Hi Duane,

    I agree with you but it is true that using cash can lower your credit scores.

    30% of your FICO score is based on the amount you currently owe lenders so, if you do not have any debt and only use cash, your FICO score will be affected.

    Even though it will hurt your score, I think being debt-free is the way to go. If you don’t owe anyone anything, who cares what your credit score is? In addition, if you use cash to pay for your purchases and do not need a loan it really does not matter what your FICO says.

  • Laurie Pawlik-Kienlen Post author

    Duane, thanks for your question — and Bruce, thanks for your comment.

    The question about credit cards is beyond my knowledge about credit scores, so I’ve asked the experts at Bills.com to reply….I’m having a problem with my comment function (they’re not all posting, grrrr!!), so there might be a slight delay. Sorry about that, and hang in there….

    Laurie

  • Bruce

    Your credit rating is based on the credit you use. If you never take a loan and don’t use credit cards there is a very limited amount of information available to show your ability to handle credit.

  • duane wandel

    My wife and I do not owe on our credit cards, they are always paid when they come do.But the cards we no longer use, your suggesting leaving the accounts open instead of closing them? How bad could that really effect someone who has the ability to pay cash as they go? Fico scores should be based on a persons ability to stay out of dept not just how well they did to pay their dept down. Are you suggesting that if we cancelled all credit cards that we would not be able to go to a bank and ever borrow even if we are dept free? I think that would be rediculous for banking institutes to do business that way. Thank You for your time