Understanding Your Credit Score: What You Need to Know
Most people in the United States today have heard of a “credit score” or a “credit report” but unfortunately not many people know the difference between the two. In fact, not many people are aware of all the different ways in which your credit score is used today.
It is important for everyone to keep track of their credit score and report on a regular basis. A low credit score can negatively affect you in a variety of ways. Knowing your credit score is particularly important when:
- Securing a loan of any kind
- Applying for credit cards
- Signing contracts with mobile phone carriers
- Signing contracts with insurance carriers
- Renting property
- Securing a new job
Many people are particularly surprised that their credit score could be used in determining whether or not to hire them for a new job. But according to the Chicago Tribune, employers that looked at your credit score in consideration with hiring rose from 19% in 1996 to 42% in 2006.
So with all the important aspects of your life that are tied into your credit score, it is important to have an understanding of what it is, where it comes from, and how you can stay informed about it.
Credit Score vs. Credit Report
Many people don’t realize that a credit score and a credit report are two different things. A credit report is a record of an individual’s past borrowing and their repaying, specifically focusing on negative aspects like late payments, bankruptcy claims, judgments or liens of any type.
A credit score, on the other hand, is a number used to represent the information in your credit report and reflects whether you are considered a low risk or high risk candidate for loans and other financial transactions.
Your credit score is determined by a specific mathematical formula which can be found at MyFico.com, but the majority of your score is determined by your payment history and by the current amount of money you owe to various lenders, whether that be student loans, car payments, mortgages, or outstanding credit card debt.
Getting Your Credit Report and Score
The Fair Credit Reporting Act states that all credit reporting agencies are required to provide consumers with one free copy of their credit report to anyone who requests it, once per year. A website has been set up specifically for this purpose: www.AnnualCreditReport.com.
From this website you can receive a free copy of your Experian, TransUnion, or Equifax credit report. However, you cannot receive a copy of your credit score for free. If you would like your credit score included with your credit report, you will have to pay a one time fee for it, but the FTC dictates that this fee cannot be in excess of $10.00.
There are a wide variety of businesses which claim to provide you with a copy of your credit report and score for free; however these “free” reports often come with a 7 day trial of identity theft and consumer protection services. If you are able to cancel your membership within the trial timeframe, your report will be free, but if you do not you will automatically be enrolled in a monthly subscription that you can cancel at any time, but no refunds will be given.
How to Manage Your Credit
When you receive your free credit report, if you believe there is any information on the report that is inaccurate – regarding late payments, accounts you never opened, or anything you believe to be untrue – you can file a formal dispute with the credit reporting agency.
Once you’ve filed your dispute, the agency has 30 days to prove the accuracy of their information, otherwise they must clear it off your record. If you have ordered your report from AnnualCreditReport.com, the agency has 45 days to respond.
In addition, if you are told by a bank, insurance company, or other entity that you were denied services because of your credit score, you have 30 days to access the report they requested at no charge to yourself.
Finally, there is a lot of free information available online on how to effectively improve your credit score. The US General Service Administration offers information on “Building a Better Credit Report” and “Credit Reporting 101.”