The importance of understanding your credit report and credit score
Are you aware of your credit score? Credit is a vital part of your financial health and affects your ability to purchase a home, rent an apartment, or obtain a credit card.
Think of your credit score as a financial tool: if you have a good rating, you have the leverage to get better deals on a loan or mortgage—but the lower your score, the less leverage you’ll have when applying for financial help.
A credit report and credit score are not the same things. Your credit report contains information that a credit reporting agency has received about your finances. Using a mathematical formula, this information will decide your credit score.
How is my credit score calculated?
Your credit score is a number (usually between 300 and 850) that is calculated based on the following criteria:
- Your payment history
- Any outstanding balances on credit cards or loans
- The length of your credit history
- Any applications for additional credit accounts
- The types of credit you already have: mortgages, auto loans, and credit cards
These factors determine your credit risk and are used by creditors to decide the terms and interest rates they will offer you. A high score means you are lower risk, making it easier to get a loan, rent, or buy a home, or reduce your insurance premiums.
What is a credit report?
Your credit report shows your current debt or loans, your payment history, and other financial details. It lists your address and employment status and whether you have been arrested, sued, or filed for bankruptcy.
The information is available to lenders to help them decide if they’ll approve a loan or provide credit. Landlords, employers, and insurers may also access your credit report, so it’s important to review your file periodically to ensure your personal and financial details are accurate.
Who compiles my credit report?
Several credit reporting agencies (CRAs) are responsible for collating and maintaining the correct information on credit reports. The Fair Credit Reporting Act (FCRA) is Federal Government legislation that ensures the fairness, accuracy, and privacy of the information contained in CRA reports.
The importance of checking your credit report
Identity fraud is a growing issue: 33 percent of US adults have experienced identity theft—more than twice the global average*. Thieves use information, such as your name, credit card details, or Social Security number to gain credit in your name. When they default on the payments, this is negatively reported on your credit report.
Victims of identity theft often don’t know they have been targeted until they are refused credit or a mortgage, which is why we recommend that everyone check their credit report for any discrepancies or fraudulent activity.
Reporting a discrepancy
If you believe that any of the information on your credit report is incorrect, inform the relevant CRA in writing. Provide evidence of the issue you are disputing and request that it either be corrected or removed from your file.
The CRA must investigate your case and send you the results in writing. If your dispute is upheld, they will provide a free copy of your amended report.
If the case is not resolved by the credit reporting agency, you can apply to have a statement of the dispute included in future reports, but there may be a fee for this.
Where can I obtain my credit report?
There are three CRAs in the United States: TransUnion, Experian, and Equifax. Each is required by the FCRA to provide an annual free copy of your report, at your request. You can order your credit report online.
Is your credit score affecting your finances?
If you are in debt or have a low credit score that is affecting your finances, Effective Debt Relief offers a range of practical debt solutions to help you take control of your debt and understand your credit score. Call us on 800-940-5449 for a free assessment.