The Ultimate Guide To Building Your Credit Part I
Your credit score and underlying history is one of the most vital parts of your financial life. Your credit score follows you forever and it will play a huge role in many major financial situations throughout your life. Many people think that a credit score only really matters when it comes to being approved for a loan or credit card, but it goes far beyond that.
What is a credit score?
In order to explain why credit scores are important, we need to start at the beginning. Simply put, a credit score is a three-digit number that uses information from your credit report to assess your creditworthiness. Basically, it’s an indication of how likely you are to repay debts in a timely manner.¹
The leading credit score in the industry is FICO and range from 300 to 850
Credit reporting agencies?
A credit reporting agency (CRA) is a company that collects information about where you live and work, how you pay your bills, whether or not you have been sued, arrested, or filed for bankruptcy. All of this information is combined together in a credit report. A CRA will then sell your credit report to creditors, employers, insurers, and others. These companies will use these reports to make decisions about extending credit, jobs, and insurance policies to you.
- Equifax or by phone at 1-866-349-5191
- Experian or by phone at 1-888-397-3742
- TransUnion or by phone at 1-800-916-8800
Why does my score matter?
Your credit score plays a pivotal role in your financial journey. As far as numbers go, it’s one of the most important digits that’ll ever be attached to your name. Here are some key aspects of your life it could impact:
- Whether or not you’re approved for credit. Many people scorn credit, but the simple fact of the matter is that in most situations, your credit score is a deciding factor in whether you’ll be approved for a mortgage, car loan, credit card or another type of loan. Lenders want to be paid back, so if your score indicates that you’re an unreliable borrower, you may not get the credit you need. And although there are loans available to those with weaker (or no) credit, you probably don’t want to rely on payday loans, pawn shop loans or other loans with sky-high interest rates and fat fees.
- How much you pay in interest. Want to save a lot of money? Improving your credit health can help you qualify for the best rates and terms. It may sound simple or too good to be true, but the higher your score, the less interest you’re likely to pay each month and overall. Did you know that if you have a credit score of 650 and get a 30-year, $400,000 mortgage, you could pay over $70,000 more in interest than someone with a 750 credit score and the same mortgage? That’s huge! Forget clipping coupons– your credit score probably has the most potential to save or cost you your hard-earned money.
- Other factors. If you don’t plan on applying for credit in the near future, you may think that your score isn’t that important. However, your score doesn’t just affect your ability to get favorable loans and great credit cards. If you’re looking for an apartment, your score may impact your probability of getting approved, the size of your security deposit and how much you pay in fees. It can also impact how much you pay for home and auto insurance and might even decide whether you’re approved for a new cell phone plan. Clearly people other than lenders care about your credit score– and you should too!²
How To Build Your Credit
Step 1 -> Find out your current credit score.
Free Credit Reports
You are entitled to a free credit report from each of the three credit reporting agencies (Equifax, Experian, and TransUnion) once every 12 months. You can request all three reports at once, or space them out throughout the year.
Request your free credit report:
Online: Visit AnnualCreditReport.com
By Phone: Call 1-877-322-8228. Deaf and hard of hearing consumers can access the TTY service by calling 711 and referring the Relay Operator to 1-800-821-7232.
Annual Credit Report Request Service
PO Box 105281
Atlanta, GA 30348-5281
This will give your your credit report, but not your credit score. The 3 credit reporting agencies will try to get you to pay for your score. You are free to do that, or you can, go to creditkarma.com and get your free credit report and score. The score will not be exactly the same as your credit score from the credit reporting agencies, but it will be close.
Take a look at your credit report and see what is being reported if anything. The first step to building, and raising your credit score is to check your credit report for errors.
Fixing errors on your credit score can result in your credit score going up by a few points or more. Look for errors in the spelling of your name, address, occupation, credit accounts, reports on balances etc.
Items on Your Credit Report and What they mean.
Personal Information– This includes your name, addresses and employment information.
Tradelines or Credit Accounts – “Tradeline” is industry jargon for “account.” So, if you have a credit account, you have a tradeline. A credit account can be a credit card, loan, mortgage, or any borrowed funds you have to pay back on a set schedule. Every month, your payment history is reported by each credit account. The report says whether you paid the amount owed on time or not.
Credit Inquiries – Credit inquiries are requests by a “legitimate business” to check your credit. Credit inquiries are classified as either “hard inquiries” or “soft inquiries” – only hard inquiries have an affect on your credit score.
Soft inquiries are all credit inquiries where your credit is NOT being reviewed by a prospective lender. These include inquiries where you’re checking your own credit (such as checking your score in myFICO), credit checks made by businesses to offer you goods or services (such as promotional offers by credit card companies), or inquiries made by businesses with whom you already have a credit account.
Hard inquiries are inquiries where a potential lender is reviewing your credit because you’ve applied for credit with them. These include credit checks when you’ve applied for an auto loan, mortgage or credit card. Each of these types of credit checks count as a single inquiry.
Collections – A collection can result from a debt that has not been paid on time. If you become significantly delinquent on a debt, such as a medical bill or credit card bill, the original company owed will often write off this debt as a loss and sell it to a collection agency. The collection agency will then attempt to recover the money owed.
While different creditors and lenders have different policies, many credit card accounts are sent to a collection agency after 180 days of non-payment. Either the original creditor or the collection agency may report the account in collections to a credit bureau, resulting in the account being marked on your report with a “collection” status. You will not necessarily be notified by the original creditor that your account is being sent to collections.
Public Records – There are three types of public records that can appear in your credit report: bankruptcy, civil judgments and tax liens. You don’t specify which is in your credit report.
Typically, these types of public records stay on your credit report for the following periods:
- Bankruptcies: seven to ten years
- Civil Judgments: seven years
- Foreclosures: seven years
If information included is out of date and remains on your credit report, you can dispute it as an error to the credit bureau.
In each case, the status of the public record is included in your credit report. The entry will indicate whether a judgment is paid, a bankruptcy discharged, or a tax lien settled.
Check your credit report. Keep it handy for Part II