FreeCreditScore.com
Check Your Credit Report

If you have led a reasonably responsible financial life and still find you credit score unreasonably low, it is quite likely that false information or expired transactions have found their way into your credit report. Before 2000, customers could not view their credit reports for free and, therefore, could not dispute anything found in them. A landmark act, passed by the Congress, made credit-reporting bureaus, the companies that generate these reports, legally obliged to give anyone who asks a free copy of their credit report.  This means that you can get your annual free credit report once per year. Go to one of websites of the big three credit-reporting bureaus in the United States: Experian, Equifax or TransUnion. Request a free credit report. Download it and got through every item to see that the information in it is accurate and fair. If you find a discrepancy, you can use the company’s online dispute tool to notify the credit-reporting bureau in question. Since your credit score is calculated directly from this information, it is essential that you spend time in checking whether or not you are being fairly represented.  You can also go to annualcreditreport.com.

Keep Your Old Credit Cards

One of the first things consumers do when they realize that they have a low credit score is eliminate credit instruments like credit cards. While it is true that misuse of such things is what leads people into debt, eliminating them does no good to your credit score. You must know that there are a number of things that credit-reporting bureaus look when they rate and one of these things is the length of your credit history. For example, if you have a credit card that you have owned for decade, your credit history will be at least that long. A longer credit history translates into more reliability. You have been in the financial market for longer and, hence, are less likely to default on your payments. If you cancel that card, however, your average credit history is lessened and this reflects badly on your credit score. Be careful, therefore, to not make rash decisions and cancel cards. Just be more prudential and cease to use them.

Negotiate With Creditors

Your creditors report the information on your credit report to credit-reporting agencies. Things like late payments, for example, are individually recorded against your name. Something you can do is to ask creditors to delete this information from your record in return for a bulk repayment or on good faith. This works particularly well for smaller banks and individual lenders. It may not always be possible with a larger bank. It is, however, an option and a very effective one at that so make sure that you have given it a shot before you try anything else.

Turn Your Financial Life Around

A bad credit score is the result of poor financial behavior. The best and the most effective method of improving your credit score is to change the way you view money and credit. Start making payments on time and continue to do so for at least six months and you are guaranteed to see tangible results. Changing your financial behavior attacks the problem at the root. You will not only see your credit report clean up and your credit score rise. You will also see a marked improvement in your spending patterns and your attitude towards money. Always remember that the best solution to a problem, in this case, a poor credit score, is not always the easiest but it is, without a trace of doubt, the one that guarantees long-term results.

Your Financial Report-Card

All of us have had the experience of schooling and are well accustomed to the concept of report cards. School report cards serve the purpose of informing the parents how a child is doing in school, what subjects he or she is good at and what areas he or she needs to work on. A school report, in essence, is a snapshot assessment of a child’s academic performance. A credit report is, in much the same way, a snapshot assessment of our financial condition. Its primary goal is to help financial institutions assess whether or not you are in a position to repay credit. The less likely you are to repay credit, the higher the interest on your loan. If your credit report is particularly bad a bank may even reject your loan application outright. A credit report, therefore, is the cornerstone of your financial planning. Without a good enough score you are less likely to have access to low-interest loans or loans with a comparatively lower down payment.

What Goes Into A Credit Report?

A credit report is quite a comprehensive document. It looks at a wide range of criteria to arrive at a conclusion about your financial capabilities. The first thing it looks at is your standing with the law. Previous or pending lawsuits and arrests indicate that you are a high-risk borrower. Time spent in jail lowers your credit score drastically. It is, in fact, one of the most crucial attributes of your credit report. A credit report also looks at your previous history with borrowing. If you frequently missed or delayed payments or took too many loans at once, the assessment firm is likely to lower your score depending on the gravity of the incidences. Defaulting a loan or filing for bankruptcy is a deal-breaker for most financial institutions. Socio-economic factors are also taken into account. Where you live is a very important consideration. So is your job. Your marital status and the number of children you have, for example, is another important criterion in such an assessment. As a rule of thumb, anything about your life that has been documented and has a bearing on your financial condition is a possible candidate for scrutiny when it comes to your credit report.

Making the Credit Report Process Fair

Because credit reports play such an important role in our financial decisions, the government has a number of checks and balances to ensure that a credit report is done in a fair and consistent manner. Most of these rules and regulations are codified in the Fair Credit Reporting Act (FCRA), passed in 1970 and amended several times since. A specialized company called a Credit Reporting Agency (CRA) carries out the function of assessing the credit history of customers. The FCRA puts forth three major stipulations that spell out a consumer’s rights when it comes to how CRAs report their credit history. CRAs are obliged by law to give a free credit report every year to any customer that requests it. Secondly, if information on a credit report is disputed and is later revoked, the CRA cannot reinsert that piece of information without informing the customer in writing within five days. Last but not least, the government regulates how long negative information stays on your record. There are varying time frames but as a general rule of thumb, negative information does not stay for more than seven years on your credit report. The only exceptions to this rule are bankruptcies, which stay on your record for ten years. There are also a number of directives that limit how a CRA can use general information about a customer. All in all, you can be assured that your credit report is being done in the fairest manner possible.

Basics of Credit Scores

A credit score is essentially a number, a very important one at that. This number represents your financial history, taking into account a number of criteria and running them through sophisticated statistical tools. A credit score basically summarizes all the information in your credit report to a single number. Before a financial institution grants you credit, it will want to determine how likely you are to pay back a loan or how much financial capability you have to take the loan in the first place. A single glance at a credit score can give them a very good idea about this information. As you can tell, maintaining a good credit score extremely important if you are even remotely planning to take out a loan or buy something on credit.

How Is My Credit Score Calculated?

A complex formula, which represents a number of statistical procedures, is employed to calculate your credit score. Knowing the mathematical technicalities of that formula is not necessary but it would do you good to know how different aspects of your financial status factor into this formula and how much weight they have. The single largest component of credit score formula is your payment history. It is assigned a weight of 35%. Payment history takes into account your previous loan repayments, whether or not they were on time and how long you took to repay the loan. Defaulting on loans and filing for bankruptcy adversely impact this segment of your credit score. Outstanding debt, or amounts owed, account for 30% of the credit score formula. The higher this amount is, the less credit you are likely to receive. The amount of new credit you have taken and the types of credit used account for 10% each. The remaining 15% is assigned to the length of your credit history. This component helps financial institutions gauge how seriously they should take your credit score when determining your credit worthiness. A longer length implies more data and, hence, a more accurate representation. A shorter credit history length can at times be unreliable and financial institutions will take this into account. All this information is calculated and compiled into a single number ranging from 300 to 850.

How Is My Credit Score Used By Financial Institution?

Now that you have a rough idea about how your credit score is calculated, the next step is to learn about how financial institutions use this information to determine your credit worthiness. A score of 700 or above is considered excellent. Scores between 500 and 699 are considered average. Scores below 499 are considered sub-par. The first thing a financial institution uses your credit score for is to determine whether you are eligible for a loan in the first place. A credit score that is substantially below 499 is likely to disqualify you for any form of credit. If your scores are between 500 and 699, the financial institution will probe deeper into your credit report to get a better idea. Scores of above 700 almost instantly guarantee you a loan. Once your loan has been approved, the credit scores are then taken into account to determine the amount of interest you will be asked to pay. Once again, a lower score means higher interest and a higher score means lower interest. The exact amount of interest varies from product to product but the difference between the interest awarded to a person with a high credit score and the interest awarded to a person with a low credit score can be as much as 4%! Your monthly installment limit and the length of the loan period are also based on your credit score. Simply put, a good credit score ensures that you get a good deal when you shop for a loan. A bad one, however, puts you at the shorter end of the stick and gives financial institutions considerable leverage when hammering out the technicalities of the loan, if you are granted one in the first place.

Introducing The FICO Score

The process of credit scoring is carried out primarily by specialized companies called Credit Reporting Agencies (CRAs). These agencies have access to a large amount of private financial information, which they use to arrive at a singular number. The FICO score, which is by far the most widely used credit-scoring instrument, was developed in the late 1950s by a man named Bill Fair and a mathematician named Earl Isaac. They both established a company called the Fair Isaac Corporation whose primary business was to provide lending institutions an insight into their corporation. For almost half a century, this information was kept away from customers under the pretext that revealing a customer’s FICO score would be of little value of their financial planning. In 2000, however, a landmark congressional ruling paved the way for public access to FICO scores. There are three variants of the FICO score developed by three major CRAs: Experian, Equifax and TransUnion. Your score may vary from CRA to CRA. Recently, however, all three CRAs collaborated to produce a consolidated credit score called VantageScore and this metric has started to become the standard.

History Of Credit Scoring

Bill Fair and Earl Isaac established the Fair Isaac Corporation for the simple reason that there was a tremendous need among financial institutions to ensure that the people they were giving credit to had the financial capability to pay their money back. Bankruptcy laws often left creditors in the dust. The FICO score, therefore, was developed to be a metric that looked at a potential customer’s full financial history and mathematically calculated the probability that he or she would pay the loan back on time. In the 1950s, however, Bill Fair and Earl Isaac did not have enough data to work on. The biggest achievement of the FICO score, therefore, is the introduction of a system that meticulously keeps records of each financial transaction and facilitates the easy transfer of information between like-minded financial institutions, a system that took more than twenty years to be fully functional! Since 1958, when data collection for the FICO system formally began, the world has become more networked and companies like FICO have the Internet and other related technologies to collect information. The result is an incredibly accurate score that is rarely wrong.

Use of Credit Scoring Beyond Lending

Financial institutions use credit scoring primarily to ascertain whether or not you as a customer are in a position to repay the loan within the stipulated time period. There are, however, a few other uses for the credit score. Firstly, because credit scores take your entire financial history into account and meticulously crunch numbers to arrive at a conclusive rating, they offer Americans an incredible amount of insight into their spending habits and financial health in general. Even if you are not interested in taking a loan or buying something on credit, knowing your credit score and reading your longer, more comprehensive credit report can help you figure out where you need to improve on financially. You may be overspending in certain areas or taking unnecessary financial risks in another. A credit score can help you figure out what’s right and what’s wrong with the way you handle money. Another up and coming use for credit scoring is to determine insurance premiums. Studies have positively correlated high credit scores with fewer claims so a number of insurance companies now use credit scores to determine, among other things, what your premium should be and what the terms of your insurance include.

Lifetime of Credit History Information

A common mistake that people make when analyzing their credit history is either assuming that information stays on their reports forever or, conversely, that it is taken off quickly. Different kinds of financial information have different lifetimes on your credit report. Serious financial delinquencies, like bankruptcies for example, stay on your record for as long as ten years. Minor financial misdemeanors like missed or late payments, however, stay on your record for at most seven years. Inquiries have a lifetime of two years on your comprehensive credit history but your credit score typically only considers inquiries made in the last year only. As a general rule of thumb, however, negative information lowers your credit score very easily and is hard to reverse. The best approach to maintaining and improving your credit score is to follow a strategy of prevention rather than treatment.

Lower Your Credit Utilization

Credit utilization, or debt limit, is the amount of credit you have taken against the amount you have available to you. For example, if your credit card allows you spend up to $5,000 on credit and you spend $4999, you have high credit utilization. This essentially means that you are highly dependent on credit for your daily needs and hence are unlikely to be able to take on a new loan. Note that even if you are extremely prompt in your payments and have never made a late payment or defaulted on a loan, financial institutions will still look at your credit utilization to ascertain your financial health. The first step you must take to improve your credit score is to lower your credit utilization. As a rule of thumb, spend only 30% of your credit limit and always make your payments on time.

Limit Your Sources of Credit

A common strategy that people take when they are burdened with debt is to shift it between credit cards. You owe a certain amount of money on a credit card from a particular company. As the payment date approaches, you take money on credit from another card and pay off the first. Rotating credit never shows up favorably on your credit scores. The best thing to do is just pay off existing your debt on one card without resorting to more debt, start afresh and see you credit score rise substantially. The only exception to this rule is if you are financially healthy already. One criterion of the FICO score is how varied your sources of credit are. If you have taken credit from varied sources and successfully paid back the amount you were lent, creditors will assume that you know how to handle money. For most of the population, however, stick to the tried and tested rule of limiting your sources of credit.

It’s Never Too Late

People often give up when they see their credit scores plummeting and this almost knee-jerk reaction affects their scores even more. Always remember that credit histories are not written in stone and there is a lot you can do to improve them. A particularly low score may take time to improve but be aware that such an improvement is possible only if you put your mind to it and observe some amount of discipline in financial matters. For example, if you have missed payments and this has lowered your score substantially, start making payments on time and keep this up for a year. Your credit score will drastically improve. Another thing to remember is that although small things like missed payments stay on your credit history for seven years, the longer away they were, the less they are accounted for in the credit scoring process. It is never too late to clean up your finances. The earlier you realize this and the earlier your start, the sooner you can reap the benefits of a good credit score.

Payment History and Debt Level

These two components account for 65% of your FICO score. Payment history indicates how frequently you pay your loan installments or whether or not you are on time. Lenders are not only concerned about the income you generate and your net assets but also about how prompt you are. Companies like FICO analyze your payment history and give it such importance in the calculation of your FICO because it reveals a lot about your financial behavior. Behaviors that contribute negatively to the FICO score in this category include late payments, filing for bankruptcy, defaulting on a loan and collections.

Debt level is the amount of credit you have taken in comparison to the amount of credit you have available to you. For example, if you have a credit card with a limit of $20,000 and you spend only $2000 a month, you have a debt level of 10%. A lower debt level, or lower credit utilization as it is more commonly called, indicates that you are not heavily reliant on credit for your daily living. Financial institutions, for obvious reasons, consider such customers perfect candidates for a low-interest loan. As a rule of thumb, make sure your credit utilization on your credit card is 30% your card’s limit.

Length of Credit History

Because your FICO credit score looks at your financial history, the more information that is there to work on, the more accurate your credit score will be. If you are young and have a credit history of only a few years long, financial institutions have little information to work on. They cannot predict your spending habits or your creditworthiness with any amount of history. If you have a detailed credit history of several decades, however, your FICO score is likely to be a much better representation of your financial capabilities. A good way to ensure a longer credit history, especially if you are young, is get yourself into the financial system as soon as possible. Open a bank account as soon as you are legally of age. Those years, even though they are mostly financially inactive, count for something in your FICO score. Length of credit history accounts for 10% of the credit scoring formula.

Inquiries and Mix Of Credit

What most people don’t realize is that every time they apply for a loan, a record is made in their credit file. If they have continuously applied for loans and have been continuously turned down, financial institutions may suspect that something is not quite in order. Numerous applications a year may indicate to creditors that you are desperate for money or are in some kind of financial mess. It follows, therefore, that large numbers of inquiries will adversely affect your credit score. The FICO score only takes into account inquiries that have been made in the last year although databases retain your inquiry information for the past two years. Inquiries account for 10% of your credit score.

Mix of credit gives financial institutions an idea about your financial sophistication. If you have borrowed money from a variety of lending institutions and have successfully managed to pay all back, this tells a creditor that you know how to handle money. You must note, however, that creditors consider mix of credit seriously only when there is a dearth of information in other sections of the FICO score. Mix of credit accounts for 10% of the credit scoring process.

Is Your Life Compatible With Credit?

One of the primary ways through which people pay for things that they cannot at the present moment afford is credit. Credit cards, loans and mortgages are common types of credit that most of us are familiar with. The question you need to ask yourself before venturing out into a credit-related financial decision is can you really afford to take out a loan at this point? There are several things that need to be present in your life that make it compatible with credit. For starters, a steady job is of the essence. Never attempt applying for credit without the assurance of continued income for at least a decade. Doing so is to dig yourself into a nice, deep grave. Secondly, evaluate whether or not you can wait and save. Is the thing you are planning to procure on credit an essential need? Can you delay its purchase until you have enough savings? If you have checked whether your life is compatible with credit and the purchase is of immediate need, using credit is a sound financial decision.

Go Through Your Credit Report and Credit Score

Anytime you approach a financial institution for credit, they will pull up your credit report and go through it with a fine comb before granting you a loan or any other instrument of credit. A good idea, therefore, is to go through what they will see before you approach them for a loan. That way, you will be prepared to answer any questions they have and will have a better idea of what kind of deal they will get you. Financial institutions use your credit report and credit score not only to ascertain your eligibility for a loan but also to structure the loan itself: loan period, interest rate and other technicalities. Knowing what your credit score is can help you roughly gauge the types of loans you will be offered by a financial institution. If your credit score is particularly bad, you might want to consider recovering it to a healthier position before applying for any type of loan.

Finalizing The Type of Credit

Once you know how credit-reporting agencies are presenting your financial health to banks, you can begin thinking about what kind of credit would be best to finance your need. A number of things must be factored in. The size of your paycheck and your family plans will dictate the length of your loan. Smaller monthly payments mean a longer loan period. You also end up paying more than the price of what you are purchasing on credit because of the interest the bank charges. Other things you need to be careful to factor in are your age, your health and any other credit-related commitments you have. Even if a bank approves your loan at a specified interest rate and loan period, you need to be absolutely sure that it is in a form that suits your life and your plans for the future.

Rearranging Your Life for Credit

Loans, especially those involving large sums of money like a home mortgage, will demand a lot from you. Until you pay back the amount you owe, you need to constantly be reminded that you are not yet out of danger. You need to consciously rearrange your life and spending habits to accommodate credit. Spend only where necessary. Do not rely on additional credit for your day-to-day needs. When your paycheck comes, subtract the amount you owe to financial institutions on the first day itself. Consider that money someone else’s. If you program yourself to living with credit and have enough discipline, credit is a blessing. If not, you are heading down a dangerous path.

Take A Step Back

If you reached financial rock bottom and your credit scores are pathetic, the first thing you need to stop, take a step back and retrospect. Every failure you go through is an invaluable lesson. Analyze what it is that got you to where you are and what could’ve been differently. Do not be afraid to ask yourself some tough questions. The first step to repairing your credit, as silly as it sounds, is to take a long, hard look at yourself and understand what behaviors and attitudes contributed and led to your current financial situation. It is only on the bedrock of this process of introspection that a full financial recovery can be attempted.

Exit Existing Credit Traps

Credit in itself is not a bad thing. The idea of buying things on credit and paying back in installments is a beautiful concept that has helped many people live better lives. The danger, however, lies in spending money you don’t have. Credit cards and other credit instruments have ruined the lives of numerous families because people spent copious amounts of money without having the means to pay their lenders back. Bankruptcy cases have spiked ever since the introduction of easy credit instruments like credit cards. The first step to repairing your credit score, therefore, is closing unnecessary credit accounts. This, not coincidentally, has a marked effect on your credit score. The fewer sources of credit you borrow and the less reliant you are on credit for your day-to-day living, the higher your credit score goes.

Pay Your Bills On Time, Consistently

Credit scores indicate spending behavior and financial attitudes. They, in a sense, reward consistent, positive behavior like paying bills on time. The keyword here, however, is consistent. A 6-month run of on-time payments can be broken and rendered useless by a single missed payment. Consistency is the key. Do this for a half a year and you will see measurable results in your credit score. There are a number of steps involved in repairing your credit score and paying bills on time is only one of them. One thing they all have in common, however, is the fact that they need to be followed consistently in order for their positive effects to be seen on our credit score.

Go Through Your Credit Report With a Fine Comb

Just because your credit score has been calculated by a mathematical formula based on hundreds to thousands of your financial interactions doesn’t mean that it is perfect or completely accurate. Credit reports can at times be wrong. They could have included a false piece of information or taken into account a financial transaction that has long since been expired. These little mistakes, however, can have serious consequences for your credit score. Be sure, therefore, to get yourself a copy of your full credit history and verify each and every item on it.

All credit-reporting agencies are required by law to provide one free credit report every year to anyone who so requests. Simply visit one of these agencies on the Internet and place an electronic request for your credit report. Note that while your credit report is free, your credit score can only usually be obtained by paying a small fee. But since your credit score is based on your credit report, the report will suffice for the purpose of checking whether all the information available on the public domain about your spending habits is accurate. Go through each and every item on the credit report. If you find inaccurate or false information on the report, you can use the agency’s online dispute tool to inform the concerned authorities about the discrepancy.

Why Should I Go Through My Credit Report In The First Place?
There are two major reasons why you should bother going through your entire credit report. Firstly, going through your credit report gives you birds-eye view on your spending habits and financial behavior in general. It is often hard to get this tremendously valuable, objective perspective by trying to analyze our financial decisions by ourselves. Most people, when asked, will say they are prudential spenders. When they take a closer look at their finances, however, it is found that they are prone to ill-advised, dangerous financial decisions. Going through your credit report, therefore, is a great way to introspect and retrospect on your financial history.

Another reason to go through your credit report is to verify whether all the information present in it is valid. Although credit-reporting agencies, the companies that collect your financial information and process it into a score, take utmost care in what they do, it is quite possible that they slip up and let false information creep into your credit report. Since credit reports and the credit scores that are derived from them are essential for your financial future, it would be a good idea to manually go through your credit report.

Getting Your Free Annual Credit Report Through A CRA
Credit reporting agencies, or CRAs, are legally entitled to give you one free credit report every year. Experian, Equifax and TransUnion, the big three CRAs, have a consolidated website that enables you to obtain a free credit file disclosure, the official name given to the free credit report scheme. To begin, visit any of the Big Three CRA websites. On the homepage itself, there should be link that directs you website called AnnualCreditReport.com, which is sponsored by Experian, Equifax and TransUnion. Make sure you are visiting this website on a secure connection. Select your state and enter information requested by the website. After entering your personal information, the website directs you to a page containing your full credit report. The process is easy, simple and secure. All it takes is a few minutes. For those of you that do not have an Internet connection or are uncomfortable with sending personal information over the Web, your credit report can be requested by mail or phone as well. Visually impaired legal US residents can request for a specially formatted credit report i.e. in large print or in audio format.

Getting Your Credit Score Free Of Cost

Although credit reporting agencies are legally bound to give all legal US residents a free credit file disclosure, they are not, however, legally obliged to disclose your credit score to you, the three-digit number that measures you financial stability. This little number is available for a small fee on most websites but there are people that would rather not spend that amount. Fortunately, you can obtain a free estimate on the myFICO website. myFICO is the consumer wing of Fair Isaac Corporation, the company is responsible for collecting the financial information about consumers. All you have to do to get your FICO credit score without paying anything is to sign up for a free trail with myFICO. The website also bundles in a free credit report. If you do not exit your free trail of myFICO services within the trail limit, you are automatically shifted to the basic myFICO credit monitoring plan.