This post is sponsored by Lexington Law
With so much terminology around credit, it can be extremely confusing on what these terms mean. And what they mean for you and your future. I used to just stare at my three-digit credit score and had no idea if it was “poor,” “excellent” or something in between. And I never even thought of pulling my credit report if I was not going to make a big purchase. But now I know that that’s a big no-no.
Even if you’re not planning to make a big purchase, it’s important to stay on top of your credit. You never know what can appear on your report and fixing your score might not happen overnight. In an effort to help you better understand some of this terminology, let’s go over:
- what a credit report is
- the breakdown of scores
- two efficient ways to increase your score
What is a Credit Report?
Your credit report has information on your financial behavior as well as personal identifying information (PII). It doesn’t give more detailed information as it is not a background check and is strictly a debt related report. It’s broken into sections:
- Personal Information
- Special Message/Consumer Statements
- Credit Summary/Account Information
- Public Records
What is a Credit Bureau?
Did you know that you can request a free report yearly from each of the three credit bureaus? A credit bureau is a company that maintains and collects individual credit information and then sells it to creditors, lenders, and consumers in the form of a credit report. There are three-major credit bureaus: Equifax, TransUnion and Experian.
They each issue separate credit reports that have information about your accounts, payment history, and credit activity. Each bureau’s report uses different codes and it’s important to read their specific information as you navigate each report. Here are examples for all three bureaus:
The credit bureaus do their due diligence to try to make sure it’s accurate and collect your information in the following ways:
- Shared information among the bureaus (usually fraud alerts as when one bureau receives notice they must share the information with the other two)
- Reported by creditors (banks and credit card issuers)
- Bought or collected by the bureaus to find information on tax liens or bankruptcy
Since each company has their own report, you want to make sure you review all three separate reports.
What Information Is on My Credit Report?
This section contains your name (inclusive of aliases), birthdate, social security number, phone number, current and former addresses, and current employer.
Special Message/Consumer Statements
This would only appear if you’ve disputed a previously claim and it wasn’t approved. It would have your statement as to why you don’t approve of the report.
Credit Summary/Account Information
In this section, you’ll find specific information about your accounts (open and closed accounts with dates, current account balance, status of your loan payments, current account balances, payment history, and how much of your available credit you use at a given time).
Late payments can stay on your report for up to seven years from your missed payment.
Bankruptcies, tax liens, foreclosures are listed here. These items can stay on your report for seven to ten years even if you’ve paid them off.
This is when a financial institution (lender or credit card company) checks your credit before deciding to give you the loan or card (you usually authorize this). Things like applying for a credit card, buying a car, or trying to get mortgage fall into this area.
What is a Credit Score?
Now that you know what a credit report is, let’s break down what the score on your report means. I really like the analogy Lexington Law notes in a blog post that your credit score is similar to a report card. It measures your credit worthiness at a point in time and lenders use that data to determine how much risk it would be to give you credit. Lenders usually look at more than your score and have access to your full report as this number can change daily.
You may have heard of the Fair Isaac Corporation (FICO) score as this is typically what most lenders use as their metric. For reference, the same post shares a breakdown of scores:
- 800+ is considered exceptional
- 670- 799 is considered good
- 580- 669 is considered fair
- 300-579 is considered poor
When you have a “poor” score, you will find it more difficult to get approved for a credit card or even sign an apartment lease. Knowing where your score stands is important as it can impact so many aspects of your life
How Can I Increase My Credit Score?
Pay Down Debt
To increase your score, it is a good idea to start paying off your debts. While this is easier said than down, here are a few suggestions noted on Lexington Law’s blog:
- Create a budget
- Pay more than the minimum balance on credit cards and loan payments, if possible
- Pay off debts with the highest interest rates first
- Once a debt is paid off, put the payment for that debt toward the next remaining debt with the highest interest rate
- Stop making credit card purchases
Resolve Credit Report Errors
Errors on your report can be the reason why your score is lower as they are not an accurate representation of your credit history. Some common errors include incorrect address, social security number or misspelled name. While these might seem like “small” errors, they can make a big difference as it might be someone else’s information on your report.
If you find an error in your report, you have the option to send dispute letters on your own or hire a credit repair company like Lexington Law to manage the process for you. They will take the hard work out of it and contact the bureaus on your behalf.