Credit 101: Understanding and improving credit scoresSherene Costanzocredit, credit scores, credit reporting, TransUnion, Experian, Equifax
A credit report is a report produced by one of the three major
credit bureaus, Equifax, TransUnion or Experian. These bureaus
compile information from creditors about an individual's credit
history and then sell the information to lenders. The information
from each of the three bureaus is not necessarily identical, since
they do not share information and creditors do not have to report
to all three bureaus. There are also credit reporting companies
that compile information from the three major credit bureaus and
then sell a merged report to lenders and creditors, which shows all
three major credit bureaus in one report. Most creditors and
lenders will review all three bureaus when analyzing a borrower;
however, there are some creditors that will only use one report
from one of the major credit bureaus. For this reason, it is
extremely important for borrowers to understand what makes up a
credit report and how to obtain the best possible score. Credit
reports contain personal identification information that does not
affect a credit score. This includes information such as a person's
name, Social Security number, current and previous addresses and
place of employment.
Credit reports also contain information that is used in
determining credit scores. This information includes the
following:
Public records
These include foreclosures, liens, bankruptcies, garnishments,
lawsuits and judgments. These items remain on the report for seven
to 10 years.
Collections
Collection agencies will report any past due debts that creditors
have turned over to them. These items remain on the report for
seven years.
Creditor accounts
These are accounts such credit cards, mortgage loans and auto
loans. They report the types of accounts, dates opened, current
statuses, balances due, credit limits and payment histories,
including any late payments. These items remain on the report for
seven years.
Credit inquiries
These list any companies that have requested the individual's
credit report within the last two years. Hard inquires are
authorized by the borrower and affect the credit score. Soft
inquiries are when creditors review one's credit in order to
solicit offers to a consumer, and have no effect on the credit
score.
The credit score
A credit score is a crucial part of the loan application. It
provides creditors with a detailed picture of an individual's
credit history and measures the risk of the account to the lender.
Each of the three major credit bureaus is a separate entity and
does not share any information. Creditors may report to one bureau
or all three, which could cause each of your three reports to
contain different information. Each of these three bureaus offers a
credit score based on one's credit report with that bureau. This
means that each individual has three credit files and three credit
scores available. Most lenders and creditors will use the middle
score. The higher the score, the better the chance is of being
approved and obtaining lower interest rates. There are several
factors that determine a credit score. These include late payments,
collection accounts, outstanding debt and credit inquiries.
Consumers should review their credit reports from all three bureaus
at least once a year to be sure that their credit histories are
accurate. Consumers are entitled to one free credit report from all
three major credit bureaus at least once a year. These free
reports, however, do not include the consumer's credit scores. All
three credit bureaus offer the score for a few dollars. The credit
scores range from about 300-850. A score of 740 would give a
consumer the best terms on a loan. Anyone with a score below 720
could benefit from credit improvement.
Credit improvement techniques
Practicing responsible credit behaviors will help improve one's
credit scores over time. Good credit behaviors include paying bills
on time, having a variety of accounts established and keeping
balances below 40 percent of credit limits. Also, limiting the
number of inquiries is important for maintaining higher credit
scores. There are actions, however, which may help speed up the
time it takes to see increases in credit scores.
Credit education
Most importantly, the consumer must understand his credit reports
and scores. Consumers are entitled to one free credit report from
all three major credit bureaus at least once a year. You may want
to keep a Credit 101 sheet handy for your clients. You may also
want to refer your clients to a reputable credit restoration
company to assist them with their score improvement and credit
education. Many of these companies can provide this service to them
for an extremely low fee and can save them the time and aggravation
of trying to improve their credit scores on their own. In turn, you
will be able to finance them now and maybe refinance them once
their scores are improved. It beats tossing them to your dead
files! Maybe you will gain a few extra loans just by referring them
to a credit restoration company and pointing them in the right
direction to improve their credit scores.
Keep credit utilization ratios to a
minimum
Revolving credit accounts should never be used to the maximum
credit limit. Creditors associate high balances with being
overextended and unable to repay or take on new debt. Keep balances
below 40 percent of your credit limits. For example, if you have a
$5,000 credit limit, it is best to keep your average balance below
$2,000. You may even want to request a credit limit increase,
rather than pay down the balance, but only take that route if you
are extremely disciplined and won't charge the balance any higher.
Do not open several new cards; the inquiries will hurt the credit
scores. Also, remember that even if you are paying your balance in
full every month, your credit card company still reports your
balance as of your closing date. To avoid this high balance being
reported, you may want to pay your balance before the statement
closing date. Pay down balances on credit cards before installment
loans.
It may also help to pay down your installment loans, such as
mortgages, auto loans and student loans, though paying down your
revolving accounts will have a more significant impact on your
credit score. Let's not forget, however, the importance of being on
time with your monthly payments on all of your accounts!
Use old credit cards
Credit history has a major impact on credit scores. It is important
to keep at least one of your oldest credit cards open and in use.
If credit cards are not being used, your creditor most likely stops
reporting the account to the credit bureaus. When the account is in
use, they send updates to the credit bureaus, which give the older
account more weight toward your credit score. Also, instead of
applying for new cards, try to negotiate for better terms with your
old credit card company.
Request courtesy removals of late
payments
A good customer with decent credit will have the best luck with
this tactic. It does not hurt for a consumer to ask his creditor
for a courtesy adjustment to his account. Whether a consumer had a
period of distress or just one accidental delinquency, the creditor
may be willing to remove it from the account in question. Removing
delinquencies should improve your credit score. This is most
successful if done in writing, and you must get the response in
writing as well. This way, you may forward your response to the
credit bureaus in order for them to correct your credit report.
Many credit restoration companies can assist you with this
technique.
Dispute old negative accounts
Creditors and credit reporting agencies make mistakes, and errors
can be reported. However, consumers are protected. Under the Fair
Credit Reporting Act, every consumer has the right to challenge any
information on his credit report. If an account in question is not
verified by the creditor within 30 days, the account must be
removed from the credit report. This process can significantly
improve one's credit score. It also works great for older accounts.
You may also want to consider using a credit restoration company to
do this process. Again, credit restoration companies can save the
consumer the time and aggravation of doing it themselves.
Correct inaccuracies
Errors that falsely indicate negative credit behaviors and lack of
responsibility, such as late payments, will affect the credit
score. Errors that do not involve credit behaviors, such as name
spelling, addresses and employers, will not affect the score. Check
for inaccuracies at least once a year or a few months before any
major purchases, such a home or a car. Inaccuracies can cost a
consumer thousands of dollars in interest on large loan
amounts.
Sherene Costanzo is vice president of Credit Consultants
Inc. She may be reached at (888) 522-7007 or e-mail
[email protected].
