Overview

These days, almost every financial decision you make will require credit. Your credit can determine what apartment you rent, what car you can buy, and even what schools you can get loans for. It’s safe to say that credit will always be a part of your life.

In this guide, we will completely break down and define your credit scores and reports to help educate you on the factors that can affect this essential part of modern day life. We will also help guide you on methods and tricks to boost your credit.


Credit Score vs. Credit Report

First, let us briefly define the difference between your credit score and credit report. A credit report is essentially a history or log of all your credit-related activities. It also gives you a summary of your current credit activity such as payment history, total debts etc.

Almost every single person in America will have more than 1 credit report. This is because there are 3 major credit bureaus in the space: Experian, Equifax, and TransUnion. These companies collect and record financial data sent to them by various lenders, creditors, and other finance-related companies. We will dive deeper into credit reports later in this guide.

A credit score is simply a 3-digit number that the 3 major credit bureaus will give you. This number is essentially a brief summary of your credit standing. The numbers will range from 300 (bad credit) all the way to 850 (perfect credit). Each of the 3 credit bureaus will most likely give you a slightly different score. This is because lenders, creditors, and landlords will usually report your financial activity to 1 or 2 of the credit bureaus, and rarely all 3.

The credit bureaus will take the items on your credit report to produce your credit score. Although the basic methodology behind calculating your score will be explained later, these companies will use advanced proprietary equations and formulas to produce your credit score. These advanced equations and formulas are known as “Scoring Models”. Although there are 3 scoring models, there are 2 common ones: FICO and VantageScore. Know that the FICO model is the largest modeling method on the market today. Both scoring models will range from 300 to 850.


Credit Report

As we mentioned earlier, your credit report is a log of your past and current credit-related activities. The 3 credit bureaus will collect data from your lenders and creditors and record them on your report. Just as we said earlier, each one of your credit reports from the 3 major credit bureaus will be slightly different, since not all financial history is reported to all 3 bureaus.

All credit reports contain your information such as any past and current addresses, your social security number, and work history. The reports also contain information relating to your credit history summary, such as how many accounts you have open and what type of account it is. The report also includes information such as balances and credit limits.

Inquiries also get tacked onto your credit report as well. If you have any late payments, delinquencies, or liens, these will all be logged into one or more of your credit reports. Negative information on your credit report can last for 7 years, while some bankruptcy filings can stay on for nearly 10 years. It’s also important to know that if you are a responsible borrower, your credit report will reflect that.

Although many consumers believe that their credit scores are the only thing that matter, your score results from what is on your credit report. Examining your credit report can also help you find early signs of fraud or identity theft. Many credit agencies also make errors.

These errors can have a detrimental impact on a consumers credit without them even knowing. The best way to protect yourself from this is by monitoring your credit report. You may receive your credit report for free, once per year, from the government mandated website www.annualcreditreport.com.


Credit Scores

Your credit score results from the analyzation of your credit report. Since your 3 credit reports will vary, so will your scores. A credit score is a number that tells the lender the risk of default (non-payment) you can pose. The data from your credit report is extracted and plugged into a formula that provides you with a credit score. Again, your scores will range from 300 for bad credit to 850 for perfect credit.

You can think of your credit score as a “report card” that tells you how well you are doing financially. For instance, if you become delinquent on an account, your creditor or lender will report that to one or more of the 3 major credit bureaus. The credit bureaus will place a certain value on the delinquency and your score will automatically lower due to the reporter delinquency.


Score Factors

There are 5 general factors that will affect your credit score. Although the formulas used by the credit bureaus are held as a close secret, a general outline of how your scores are calculated are available. There are 5 known components that will affect your score:

Payment History: 35% – This is the largest factor in determining your score. Payment history includes credit card payments, loan payments, and more. This is where late payments and defaults will affect your score. Of course, if you have been making payments on time, this will have a positive impact on your payment history. To improve your history, make timely payments and pay any past-due bills first.

Credit Utilization: 30% – Credit utilization is simply the amount of credit that you have used. For example, if your credit card has a $100 limit and you have spent $80 on the card, you utilized 80% of the credit you were provided. Keeping this number low indicates responsible borrowing and can help increase your score. Most professionals can agree that your credit utilization rate should be less than 30%.

Length of Credit History: 15% – Length of credit history is how long each account (credit card, loan, mortgage, etc.) has been open. Overall, a longer credit history will typically increase your credit score. This factor affects younger consumers more than others. It’s best to leave your old credit accounts open to maximize this score.

Credit Mix: 10% – This percentage is calculated by the mix of accounts you have. For example, how many cards you have open, loans, mortgages, etc. It is best to not open a new credit line unless you plan to use it.

New Credit: 10% – New credit essentially means how many hard inquiries you have had placed on your credit. When you are searching for a loan or some sort of financing, the lender performs something known as a hard inquiry. This is often called a hard credit pull. A hard credit check can also be run by landlords and insurers.

There is no question that your payment history and your credit utilization (or the amount of debt you owe) are the most important factors in your score. They add up to 65% of your total credit score.

But what is good credit? Almost every lender and creditor has a different definition of good credit. According to Credit Sesame, the average score range and rating is:

Excellent: 750 and above
Good: 700-749
Fair: 650-699
Poor: 550-649
Bad: 550 and lower

The different credit score ranges in yelllow and blue


How Fast Does My Score Get Updated?

To have a transaction or credit-related item show on your credit report and score, the bank, lender, or creditor must first report the transaction to the credit bureaus. When you make a payment, that will typically be updated right after your bank sends you your monthly statement.

This process itself might take a month. Many of the “free credit report and score” websites these days are not updated. When a bank or lender pulls your credit information, however, your report and score will be up to date.


Increasing Your Credit Score

For many Americans, our only objective in terms of credit is to keep our scores high. Thankfully, there are many ways you can do that:

Pay on Time – No other factor will increase your credit as much as making on-time payments. If you are finding yourself behind on payments, give your creditor a call. Arrange a way to repay your balance while asking to have the delinquencies removed from your credit report.

Even if the creditor cannot remove your most delinquent payments, try to get current on all your accounts as quickly as you can. Every single month you fall behind will affect your score. Missed payments can stay on your credit report and score for up to 7 years alone.

Avoid Going Over the Limit – The second biggest factor is your credit utilization. This is because many banks and financial institutions believe that consumers in good financial shape should not be using more than 30% of their credit limit. If they spot a consumer with a higher than normal utilization rate, it may raise a red flag by letting the lender know that you could possibly be a default risk.

One trick you can do to stay under your credit limit is to pay for your credit card twice per month. This helps keep your overall balances down while keeping you under the 30% hurdle.

Check Your Reports – Believe it or not, errors on credit reports are more common than you think. Studies and surveys conducted by regulatory agencies show that up to 1 in 5 Americans have an error on their report. That is 20% of the population or almost 70 million Americans.

Many of these errors are clerical mistakes. Perhaps there is a person with the same exact name as you who lives in the same area or works in the same office building. No matter the reason, you must be vigilant about checking your reports and scores.

Use a Secured Credit Card – Unlike a typical credit card, a secured credit card has collateral behind it. This is usually done by a cash deposit you hand the lender prior to using the secured credit card. When you give the lender a cash deposit, your chances of approval are much higher.

What is great about secured credit cards is that you usually can only spend what you deposit. So if you place a deposit of $400, that $400 will be your credit limit. When you make on-time payments with a secured credit card, you will build your credit just like you would with a regular credit card. A secured credit card is a great way for people with less than ideal credit or a young credit history to build credit.

Become an Authorized User – Being an authorized user on a credit card is a great way to build credit. Essentially, you get a trusted family member or friend with good credit to call their credit card company and add you as an authorized user. What’s great about being an authorized user is that you do not even need to use a credit card. When your friend or family member uses their card and makes their payments on time, the positive payments will be reported on your credit report.

Pay in Your Name – Chances are you have certain utilities like water, gas, and electricity you must pay for. Many consumers do not realize that utility companies report positive payments to the credit bureaus for evaluation. If you haven’t already, put the utilities in your name. If the bills are paid on time and in full, you will experience a gradual rise in your credit score.

Get a Loan – Loans are actually a great way to build credit since they touch all 5 aspects that make up your credit score. You can take out a loan as small as $500 and up to millions of dollars if necessary. If you can, find a lender willing to give you a $100 loan with no early payoff penalties. Take the loan and simply repay the $100 with interest back on the next month or over the course of 3 months. You will see your score rise from the one-time payment. Even though the loan amount can be small, your score will increase.

 


Getting Negative Items Removed

One way to increase your credit score is to have the negative items removed from your credit score. There are a few ways you can approach this.

Submit a Dispute

One way to stall for time is to file a dispute with the reporting agency. Often, the amounts or other details on your negative entry can be inaccurate. This dispute will also help to ensure that the debt is actually yours and that the amounts owed are accurate. Submit a dispute letter to the credit bureaus first. The bureaus will have 30 days to respond to your request.

During this time, the bureaus may try to stall you by asking for “additional information” related to the negative entry. You are not obligated in any way to respond to these requests. These are common stall tactics industry players will use to try and extend the 30-day deadline.

Call Your Creditor or Lender

If you have any unpaid items on your credit report, your best bet is to call the original creditor or lender and ask to negotiate. You will want to negotiate what is referred to as a “Pay for Delete” offer. Credit bureaus will not remove any accurate information, so you must negotiate with the original creditor.

In a “Pay for Delete” negotiation, you offer to pay a portion of your delinquent debts in exchange for having it removed from your credit report. Some creditors just want to see some money and will be glad to accept your offer while some may not be so happy.

Goodwill Deletion

If you have already paid off the debt but still have a negative entry on your report, the only option you may have on the table is a “Goodwill Deletion.” This simply means you kindly ask the creditor or lender to remove the negative entry form your report out of good will. Creditors and lenders do not need to respond to these inquiries, but you will be surprised to see how many people get negative entries removed from their report by simply asking.


Final Note

Your credit score and reports will around for as long as you live. Keeping a healthy credit score and a clean credit report is a great way to save thousands of dollars in interest and get more approvals for loans and credit. By being a vigilant and educated consumer, you can spot any early signs of identity theft and fraud as well.