How to Effectively Manage Your Credit Reputation
There are some obvious indicators of a good credit score, like always paying your bills on time, but a lot of what goes into it is a mystery. When you don't know the ins and outs of your credit score and credit reputation, they both become a little hard to manage. Here's how your credit reputation is formed and how you can manage it most effectively.
What is a Credit Reputation?
Your credit report and credit score together make up your credit reputation. As soon as you get a credit card, get a phone line, or sign up for utilities, you start building what's called a "credit history". This history includes all your status across accounts, total debts, and payment history. It also contains other details related to your financial activities like known addresses, your date of birth and social security number. You will need your social security number and address to access your credit report and credit score.
All this personal information is collected and maintained by the big three credit bureaus: Experian, Equifax, and TransUnion. Credit issuers and other providers voluntarily send this data about you to the bureaus in exchange for access to it when they need to make decisions on whether you are a good credit risk i.e. will you pay them back if they lend to you.
Why Keeping a Close Eye on Your Credit Reputation is Important
Your credit reputation can help or hurt you when getting a home loan, auto insurance, or in some cases, even a job. Building and maintaining "good credit" can easily save you thousands in interest and fees the next time you need access to cash for a loan.
Arguably, your credit reputation is your most valuable financial asset. You should stay in control of as many aspects of it as possible.
The Difference Between Your Credit Report and Your Credit Score.
Your credit report includes all the gory details about your personal financial history. Your credit score is a 3 digit number in the 300 - 850 range (depending on the bureau) that is normalized and used to predict the likelihood you will default on a loan within 12 months. Because each bureau has different data, you actually have 3 credit scores. In addition to the credit bureaus differences, there are also different credit scoring algorithms in use. FICO is the most popular, but there are dozens of different credit scores in use.
Credit scores fall in these general categories:
- Excellent: 750 - 850 Good: 700- 750 Fair: 620-700 Subprime: 550 - 620 High risk: 300 - 550
How to Hack Your Credit Reputation
Know What They Know (Access Your Actual Free Credit Reports)
Although it may not look like it, AnnualCreditReport.com the only place you should go to get your free credit reports.
After answering a few personal questions to verify your identity, you can download each of your credit reports from the respective bureaus (Experian, Equifax, TransUnion). Be sure to download and save all three, occasionally information is missing from one or more reports depending on the bureau.
Here is an example of what
it looks like after you have visited 2 of the 3 bureaus and printed or saved your credit reports. This is important because you can only get one free report per year per bureau. Additional reports each year generally cost between $5.00 and $15.00.
Remember: If you want to see your actual credit score it will often cost you extra. Selling you this score is a significant source of revenue for credit bureaus, and they don't want to give this information away. You can receive free credit scores from Credit Karma. AnnualCreditReport.com serves as a gateway that links you out to each of the bureaus individually, and they may try to sell you some of their products on those sites.
Tip: Don't be fooled into signing up for unnecessary fraud and credit monitoring services. In most cases, they are overpriced and moderately useful at best.
One of the most common mistakes are misspellings of your name and address. One study by the US PIRG suggests that 25% of credit reports have serious errors that may result in a denial of credit. Check your current and previous addresses to make sure everything is correct. Your other personal details are also worth reviewing as well; my birth-date was wrong last time I did a review.
There are two things you can do to resolve negative items. First, you should immediately call the credit reporting agency in question and dispute the issue directly (Transunion: 1-800-916-8800, Experian: 1-800-493-1058, Equifax has an online dispute process). Second, if you think you may be the victim of identity theft, you should enable fraud alert protection with all of the credit bureaus. This is a free service - distinctly different from credit monitoring or fraud protection that companies charge monthly fees for.
In some cases, you may need to contact the company or creditor in question and have them look into the mistake. Furthermore, for collections-related issues (where a collection agency, not the original company, now has control of the unpaid account in question) require that you reach out to them directly. Talking to a collection agent can be quite an unpleasant experience because they presume you are trying to avoid paying them even if its a legitimate mistake.
Improve Your Credit Reputation
- The best way to look good on your credit report and have a good credit score is to pay your bills on time. Payment history is responsible for about one-third of your credit score. Reduce the balance on your credit cards. If your balances go down and your credit limits stay the same, you lower your credit utilization (or the ratio of balances to limits). The more credit you have left available to you, the less of a risk you are perceived to be. Manage your cards. Don't open new cards, and don't close your oldest cards. Opening new cards causes credit inquiries to be registered on your report, which can count against your score. Closing your oldest cards can reduce the length of credit history, and having a long credit history can improve your score.