Giving Credit Where Credit is Due

Ethan Miller, Financial Planner

March 6, 2017

Watching television in the early-mid 2000’s, it was hard to avoid commercials for freecreditreport.com, which promised a successful, happy life–as long as you knew your credit score.

While these ads were eventually pulled from the airwaves due to their deceptive marketing tactics (you had to sign up for a paid service in order to get your ‘free’ report), they were one of the first times I had heard of a credit report or a credit score. And though advertisements for other credit monitoring services are still widespread, none of these ads answer the fundamental questions: “What is in my credit report, what is a credit score and why do they matter?”

Credit Reports:

Your credit report is a comprehensive look at your credit past and present. It contains information such as loan repayment history, the status of open credit accounts or if you have ever declared bankruptcy or failed to pay rent. Lenders and others interested in your credit history often use these reports to determine your so-called ‘creditworthiness‘ and may make significant decisions based on this information, such as what interest rates to offer you, whether or not to approve a credit card or rental application, or even if they’ll offer you a job (more on that later).

There are three major companies that compile these reports using information reported to them by financial institutions.  These credit bureaus (Equifax, Transunion and Experian) are required by law to give you one free credit report each per year. The only place you can get these free, full reports is https://www.annualcreditreport.com/Other websites claiming to offer free credit reports are not part of the federal program guaranteeing this right and may make you sign up for paid credit monitoring services to receive your report.

Credit Scores:

Your credit score takes all the information included in your credit report and compiles it into one number between 300 and 850. The higher your score, the more willing a bank or other financial institution will be to give you a loan.

There are actually two major types of credit scores, FICO and VantageScore, which are each sponsored by different companies. And though the two algorithms differ, the strategies for earning and maintaining a high credit score remain the same under either formula: pay your bills on time, avoid huge credit card balances and don’t open too many new accounts in a short period of time.

Banks and or credit card companies are increasingly offering free credit score monitoring and there are numerous tools out there that will legitimately help you track your score for free (with a lot of advertising for loans you probably don’t need). It’s a good idea to have a sense of what your credit score is, though scores tend to fluctuate some month-to-month, so don’t read too much into a small change.

fico-chart

What’s a good credit score? Most people consider scores of 700 and above to be good, and scores of 800 and above to be excellent. Americans, on average, have a score of 695, according to a study from 2015.

fico-credit-score-range

So What?

Now that you know what is in your credit report and what determines your credit score, you might still be wondering what all of this matters.

First, having good credit will help you get favorable terms on a car loan, mortgage or credit card. And since even a small increase in mortgage interest rates can result in significantly higher payments, having a good score now can make a huge difference in the long-term.

But credit reports and credit scores aren’t only used by financial institutions. Your utility company may check to see if they want you to pay a deposit to secure your account. Potential landlords often run a credit check to see if you have a history of paying your bills late, and insurance companies may use your credit history in setting your premium rates.

They are increasingly being used by potential employers as well, which can limit job opportunities for those with troubled financial backgrounds and leave entire communities behind. This can trap people in a cycle of debt, leaving very few paths open to financial well-being. The good news is that 11 states have passed laws restricting the use of credit checks in employment, and organizations like the National Consumer Law Center are pushing for even more states to join that list.

For now, make sure you know where your credit history stands and be sure to report any mistakes you find on your credit report. And if you’re interested in working together to build a strong credit history, schedule a free 30-minute consultation today!

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