How To: Understanding Your Credit

A recent survey conducted by the Consumer Federation of America (CFA), a non-profit consumer organization, shows that almost half of American adults don’t know how their credit scores are determined.

The survey results go beyond a lack of information about credit. Forty percent of those who took part in the survey also believed incorrect information, such as marital status and age are factors in determining your credit score.

If you’re unfamiliar with what your credit scores are and how they’re determined, here are some simple steps you can take to better understand your credit score.

• Review Your Credit Report. By law you are entitled to getting a free copy of your credit report from each of the three major credit reporting bureaus — Experian®, Equifax®, and TransUnion®. You can obtain your credit reporting information once every twelve months by visiting AnnualCreditReport.com. Make sure you go through your credit reports thoroughly to find out what’s listed and if the information shown is accurate.
• Report All Inaccuracies. If you find any erroneous information on your credit report, let the credit bureau know immediately. This information can negatively affect your credit, lowering your score and making it harder for you to obtain financing ranging from a new credit card to a car lease or a mortgage. Lenders look at your credit score as a way of gauging whether or not you will be able to repay the loan, so making sure your report is accurate and your scores are healthy are important for any loans you may need to take out.
• Know What Factors Into Your Credit Score. While 40 percent of adults surveyed by the CFA believe that their age or whether or not they’re married are taken into consideration when determining their credit scores, neither have anything to do with it. For example, one of the most commonly used credit scores, the FICO® score, uses the following information:
  1. Payment history – 35%
  2. Amounts owed – 30%
  3. Length of credit history – 15%
  4. New credit – 10%
  5. Types of credit used – 10%
• Regularly Check Your Credit Score. You are the only person who can check your credit score without it impacting your credit. Lenders who check your credit perform what’s referred to as a “hard pull”. A hard pull will affect your credit score and remain on record to show to other lenders as a possible new debt that hasn’t been recorded yet. By checking your own score, you will have an idea of where you stand, especially if you do so before applying for a loan or opening a new line of credit.

By reviewing your credit report, understanding the different sections of it, and what the credit bureaus actually use to determine your credit score, you can put yourself into a much better position when it comes to keeping your finances healthy. When you understand your credit score, you’ll know where you stand, if you need to take action, and you’ll be able to create a budget to help you pay down your debts and to save for the future.