How did one little three-digit number become so important? Over the past decade, credit scores* have become a big part of almost any application. Your credit score impacts your ability to get approved for home loans, auto loans, credit cards, home insurance, auto insurance, utility accounts, apartments, jobs, bank accounts, and even cell phones. Given the challenging financial times, it is more important than ever to understand the basics of how credit reports and credit scores work. Get started with our quick guide to the credit world.
There are three national credit bureaus that collect data on consumers — Equifax®, Experian®, and TransUnion®. They receive information from banks, lenders, and other sources. The bureaus then store the consumer records and sell them to institutions that evaluate credit applications and/or send out mailed offers. The three credit bureaus don’t share data with each other, so you could have very different reports with each one. Sometimes the credit bureaus are referred to as credit-reporting agencies.
Your credit reports (also known as credit files) with each bureau contain information about your personal finances dating back years. Credit reports include your name, Social Security number, date of birth, phone number, employer, address, account history with loans and credit cards, records of your credit applications (inquiries), and public records, including bankruptcy, judgment, and tax liens. Your credit reports are constantly updated with
Credit scores work as a filter on your credit report data. These complex formulas were developed to help make it easy for businesses to quickly interpret all of the information on your credit reports and predict your credit risk. Most credit scores use a range from 300-850. A score of 750 or higher is considered excellent and helps you qualify for the best deals. Paying your accounts on time, keeping your debt balances low, and building a long history of responsible money management all help you to have a healthy credit score.
Bad credit can happen to almost anyone. A job loss, illness, or other hardship could lead to late payments and other negative records. Luckily, bad credit isn’t a life sentence. Negative records have legally-determined expiration dates and the credit bureaus will automatically remove most of them when their 7-10 year term comes up.
More than 11.1 million people a year are victims of identity theft according to a 2009 Javelin Strategy and Research report. This crime involves the theft and use of your personal information such as a credit card, Social Security number, bank account, or insurance policy. Checking your credit reports and monitoring your public records regularly are good ways to protect against identity theft. Specifically, you should look for unauthorized accounts or inquiry records that could be the first warning signs. If you spot something suspicious, be sure to investigate it right away. The average identity theft victim spends 25 hours resolving their case. Early identification can help you reduce the amount of time needed to recover your identity.
Using Your Credit
When you’re armed with a good understanding of your credit, you have a lot more negotiating power with lenders and other creditors. You should always check your credit before a major application to see where you stand and what kind of deal you deserve. Remember: Your credit doesn’t just matter when you’re looking for credit cards and loans. Insurance, utility, job, and cell phone applications may also require credit checks.
- Start monitoring your credit to help protect yourself from fraud.
- See the connection between credit fraud and identity theft.