All About Credit
Credit bureaus, credit reports and credit scores explained
As we continue discussing credit and how it affects your life, it’s helpful to understand the key components of the credit world:
- Credit bureaus
- Credit reports
- Credit scores
Knowing what they are and how they work is important, especially if you’re not a finance/credit geek. (Yes, we exist!) And knowing how to monitor your credit and make sure the information in your files is correct can save you a lot of time and trouble.
A credit bureau is simply a company that collects data and information from all of your creditors, or lenders. This information includes your credit accounts, like credit cards, student loans, auto loans or your mortgage. Whenever you borrow money, the lender reports that information to a credit bureau.
The three major credit bureaus are:
If you were to check your credit reports and credit scores at all three you’d probably find some differences, usually minor. Each one crunches the numbers differently, though, and one may have information about your credit history that the other two don’t. Because of this, you should check all three regularly, and later you’ll learn how to do that for free.
A credit report is a list of your credit history, including both current and closed accounts. Every account has the potential to raise or lower your credit score, and sometimes that impact can change over time. For example, getting a mortgage can initially mean you’re using much more credit, and your credit score could drop. But as you make your payments on time, your score can rise beyond what it was before, as you demonstrate that you’re a responsible borrower.
If you’re not so responsible? A closed account with negative information, such as a debt you never paid, can remain in your credit report for seven years. A bankruptcy can remain noted in your account for up to 10 years.
The good news is that the hit your credit score takes from an unpaid debt or bankruptcy begins to fade a bit sooner, so a bad debt from years ago doesn’t mean you can’t get a loan now.
A significant percentage of credit reports contain errors, and the federal Fair Credit Reporting Act (FCRA) includes a way for consumers to review and request corrections to their credit reports. The Consumer Financial Protection Bureau (CFPB), another federal agency, has helpful resources as well.
Your credit score, which can range from 300-850, distills your creditworthiness to a single number. Generally, a credit score above 700-720 is considered good, and will usually qualify for the best loan rates. Different lenders have different thresholds, though: a car ad that promotes inexpensive leasing rates “for well qualified buyers” may require a higher number to qualify.
The government requires that every credit bureau furnishes a free copy of your credit report once a year. To spot errors or possible fraud, such as identity theft, we recommend requesting a credit report from one of the three credit bureaus every four months. You can request your free credit reports here. This is the only official site authorized by federal law.
Want more information on how can you build healthy credit habits, and how can those habits help you reach your financial goals? Keep watching this space to learn more.