The Lowly Credit Score & Why It's So Important
There really is nothing very exciting about the lowly credit score – It’s just a three digit number; yet the information it conveys can influence virtually every aspect of your life: Banks use this information before approving a mortgage or auto loan and for determining the interest rate they will charge you; Credit card companies use it to issue credit cards and determine limits; Landlords will check credit scores before renting you a house or apartment; Credit reports are routinely checked when leasing or financing equipment; Employers can check credit reports when hiring and promoting; If someone fraudulently opens an account in your name (identity theft) your credit report is often the first place its reported. That three-digit number can be critical and yet according a federal trade commission report, 1 in 5 people have significant errors on their credit report. I thought I watched my credit report like a hawk – until I applied for a mortgage. Turns out, there was an address reported for me at which I never lived. Nothing major – but I did have the hassle of providing a written response.
Credit reports are maintained primarily by 3 agencies: Equifax, Experian and TransUnion. These organizations receive, store and update information from lenders in order to develop a “FICO” score. This score is used by lenders to determine “what is the risk of loaning this person money.” Scores range from 300 to 850 and the higher the better. So 670 to 739 is good, 740-799 very good 800-850 is excellent. A score of less than 669 is fair to poor. Factors that go into the credit score include:
- What % of my current borrowing capacity is utilized -If you max out credit cards, this will hurt your score.
- Payment history - Are you slow making payments ?
- The average amount of time you have held all credit accounts –New debt can lower your score.
- Total account # - More is better to a point, then no so much.
- How many lenders have inquired on your account in the past 3 years - Fewer is better.
There are other factors as well.
With so much riding on your credit report, the big question is: what is the best way to monitor it? Legally, you can request 1 free credit report from each of the major credit agencies. You can order online at annualcreditreport.com - the only authorized website for free credit reports- or by calling 877-322-8228. Fortunately, it's the 2000’s and there are apps for this! My favorite is Credit Karma. It’s free (there are advertisements of course) and it updates your sore and credit report each week. Credit Karma breaks down every factor contributing to your credit score, and helps you understand how each of these affect your credit. There are other features including a warning if any of your passwords were exposed in a data breach (one of mine was) and if you have any unclaimed money (I wish). There are other apps including: Mint: Money Manager, Credit Sesame, Credit.com, and CreditWise. You will have to play around to find your favorite.
What to do if you find a mistake on your credit report? There are really two steps. First: you must write (old fashion snail-mail) the credit reporting company, to notify them about the incorrect information. Include any documentation that may support your position. Keep copies of EVERYTHING. Send the letter certified mail, “return receipt requested,” or FedEx / UPS signature required. Legally, credit reporting agencies must investigate your complaint. When the investigation is complete, they must give you the results in writing. Step two: Write to the company making the inaccurate report. Again, include any documentation that may support your position, and send it certified mail, “return receipt requested,” or FedEx / UPS signature required. There are more detailed instructions on the FTC webpage
If you don't regularly check your credit report, take 10 minutes and do it today. Don't wait until you are denied a credit card or have an unexpected surprise applying for a mortgage. This stuff is important and can take time to fix if there are errors and a really long time if you are the victim of identity theft! Check today!