What is credit?
Credit is money that you borrow to use towards the purchase of goods and services. This borrowed money is provided to you by a credit grantor whom you have agreed to repay. The money is repaid based on the terms you and the grantor agree to. These terms will outline your allowable limits, interest rates, finance charges, and the time you have to repay them.
Why is my credit important?
In our evolving global market, we find that credit is more important than ever. Much of today’s economy runs on credit. For most of us, having favorable access to lines of credit makes it much easier to acquire the things we want in life – new house, car, apartment, cell phones, cable, internet services, and credit cards.
Being able to purchase goods and services using lines of credit allows for greater financial flexibility. Without credit, consumers would need to purchases items in full, instead of having the option to finance them. In the case of high-value items, such as a home, car, or education costs; paying in one lump sum is simply not possible.
What is a credit score?
A consumer’s credit score typically consists of a three-digit number, ranging from 300-850, that is generated using a mathematical formula, based on the information being reported to the credit bureaus. It is meant to summarize and represent the risk involved in extending credit to a consumer. The higher your score, the less risk you pose to potential lenders.
Why is my credit score important?
Your credit score demonstrates the risk you pose to a business if they were to extend credit or services to you. It helps them determine the likelihood that you’ll make your payments on time. The higher your score, the “safer” you appear in terms of financial risk.
A consumer with a low credit score is viewed as an increased credit risk, which often means the lender will add a “risk premium” to the price of the money being borrowed. In other words, lenders will charge you more money to borrow the same amount, as someone with a higher credit score, who would appear to pose a lower risk. This “risk premium” is usually seen in the form of a higher interest rate.
Is my credit score only important if I want to apply for a loan or credit account?
No. Your credit score is very important for many reasons beyond applying for a loan or credit account. Many of the services we want and need in today’s world (e.g.: renting property, insurance, cable & internet services, cell phone service, household utilities) also take your credit score into account when you apply for service.
When you sign up for these types of services, they typically pull your credit to determine your financial risk. If your score is too low, they might require you to pay an upfront security deposit or downpayment that would not be required of someone with better credit. Some companies, might outright deny your application for service based on your credit.
How is my credit score calculated?
Over the years there have been many different models/formulas developed to calculate credit scores. Currently, the most common and widely used formula (especially for home and auto loans) is called FICO (Fair Isaac Corporation) and the end result of this calculation is called the FICO score. It is estimated that approximately 90% of the top lenders use the FICO score when considering extending a line of credit to a consumer.
The FICO score is based on five factors, each of which carries a different weight, or percentage, when calculating your final score.
- Payment History (35%) – Your payment history is the most heavily weighted factor in determining your FICO score. This section demonstrates whether you make payments on time, how often you miss payments, and how many days past the due date you make your late payments.
- Account Balances (30%) – This sections is based on the total amount of money you currently owe, as well as the number and types of credit accounts you have in your name. It also takes into account the proportion of money currently owed compared against the maximum amount of credit you have available.
- Length of Credit History (15%) – This section takes into account the age of your oldest and newest credit accounts. It also factors the average age of all the accounts you have open and how long it’s been since you used them.
- Types of Credit In Use (10%) – Your FICO score will take into account the overall mixture of the various types of accounts you have. These different types can include: retail/merchant accounts, credit cards, mortgage loans, finance company loans and installment loans.
- New Accounts (10%) – The final 10% of your FICO score is determined by the number and frequency of credit accounts you have recently opened. It also takes into account the number and frequency of credit accounts you have recently applied for.
What is considered a “good” credit score?
Keeping in mind that your credit score is a three-digit number ranging from 300-850:
|Bad Credit||Below 600|
Are there different types of credit?
Generally speaking there are four types of credit:
- Revolving Credit – you are given a maximum amount of credit which you are allowed to charge. Each month you repay your credit grantor a percentage of the balance you owe.
- Charge Cards – like revolving credit accounts, you have a maximum limit that you can charge. However, unlike revolving credit, you must repay the full balance each month.
- Service Credit – when you order services from a company, they often extend you the services on a “credit” basis. That is to say, they will provide you the service with the express understanding that you will pay for the services each month. These companies can include: utilities, gym memberships, cell phone providers, and cable companies.
- Installment Credit – is when you borrow a predetermined amount of money with the agreement that you will repay the loan, plus interest, within a set amount of time. Home loans and auto loans are two common example of this type of credit.
Is one type of credit better or worse than another?
Not necessarily. Everyone has different needs and wants in life, along with different resources at their disposable. In short, the types of credit that might be best for you will depend on your situation and financial goals. The mixture of the various types of credit accounts is often reviewed and/or considered when applying for new credit or a new loan. Generally, it is a good idea to have a mixture of the different types of credit accounts.
Who calculates my credit score?
Your credit score is calculated by the credit bureau, based on the information listed in your credit report. The three main credit bureaus in the US include: Equifax, Experian, and TransUnion.
How do the credit bureaus determine what information to list on my reports?
It’s important to note that credit bureaus do not actually determine what information is listed on your reports. Their main functions are to collect consumer credit information, maintain reports of consumer credit histories, then generate a credit score based on reported information.
Where do the credit bureaus get their information?
Any company who engages in commerce has the ability to register with the credit bureaus and report their consumers’ activity. These organizations include banks, retail stores, cable companies, telecom providers, utility companies, and medical facilities.
What type of information gets listed on my credit report?
Each of the different credit bureaus might format and report information differently. However, their respective credit reports tend to have the same types of information listed.
- Identifying Information – Your name, Social Security Number, current and previous addresses, date of birth, and employment information.
- Credit Inquires – Any time you submit an application for a line of credit (e.g., credit cards, loans, etc) you are authorizing the lender to obtain a copy of your credit report. Anyone who has accessed your credit report within the last two years will be listed in this section.
- Trade Lines – This section breaks down your credit accounts. Creditors and lenders will report the type of account you have with them, the date your account was opened, your account balance, credit limit, loan amount, and you payment history.
- Public Record – Your credit report will contain public record information from state and county courts related to items such as: bankruptcies, foreclosures, wage garnishments, lawsuits, and judgements. They will also contain various pieces of information on overdue debt from collection agencies.
How long do negative items remain on my credit report?
As we know, having negative items on your credit report will almost always reduce your overall score. Below is a simple breakdown of how long certain negative items remain on your report:
|Item Type||Typical Duration|
|Bankruptcies (Chapter 7, 11, non-discharged, dismissed Chapter 13)||10 yrs|
|Bankruptcies (discharged Chapter 13)||7 yrs|
|Charged Off Accounts||7 yrs|
|Child Support (overdue)||7 yrs|
|Collection Accounts||7 yrs|
|Criminal Records (general)||7 yrs|
|Delinquent Accounts||7 yrs|
|Hard Inquires||2 yrs|
|Paid Tax Liens||7 yrs|
|Soft Inquiries||1 yr|
|Unpaid Tax Liens||Indefinitely|
How can I check what information is listed on my credit report?
In order to determine what information the credit bureaus are listing on your credit report, you need to request your report from them. Since the main credit bureaus format and report their information differently, it is often a good idea to request your credit report from each of the main bureaus.
You can also give us a call at 1-888-438-8755 for a FREE TransUnion credit report summary!
Will checking and requesting my credit reports impact my credit score?
No. Checking and requesting your own credit report is considered a “soft inquiry” and will not impact your score. Soft inquiries do not hurt your credit score, unlike a hard inquiry, which can effect your score.
If someone else checks and requests my credit reports, will that impact my score?
The short answer is that it depends. If an organization is checking and requesting your credit report, for the purposes of determining your creditworthiness for a line of credit; it can negatively impact your score. These types of negative checks are called “hard inquiries”.
On the other hand if an organization is checking your credit as part of a background check or identify verification, these typically fall under the category of soft inquires and should not impact your score.
If you have a specific situation in mind, the best idea is to speak with the organization who is going to check your credit as well as with the credit bureaus themselves.