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Credit scores and credit reports: What are they and can you positively influence them?

Credit-card-and Credit Scores Side by Side 6401275_640What’s the difference between a credit report and a credit score?

Credit reports. A credit report is a record of your current and past debts, including your history of payments. It’s used by banks, other financial institutions, and businesses to make decisions about your loan, rent, and sometimes employment applications.

Credit scores: A credit score is a number based on information available in your credit report. Good credit scores suggest to banks and other financial institutions that you’ve handled your finances well. A credit score predicts how likely you are to pay back a loan on time.

To understand how each one works and how you can improve them, the Federal Deposit Insurance Corp. offers the following information:

What’s in your credit report?

Your credit report states what loans you have, how long you have had them, and the balances. It includes information on what you owe on credit cards and how well you’re repaying them.

The report also contains information about loans you may have defaulted on and any debt collections and judgment activities, which are court ordered decision on a debt payment.

Banks, courts, and other businesses report information to credit reporting agencies. They compile the information from these sources to create your credit report.

Understanding the information in your credit report can help you achieve and maintain a good credit history.

A website to order your credit report for free is AnnualCreditReport.com.

How do credit scores work?

You have more than one credit score, because different credit reporting agencies calculate your score differently. Usually, your scores are similar, but not identical. Credit scores also change over time as information is reported.

For example, when you pay off a loan or get a new loan, that information is reported to credit reporting agencies and your credit score is recalculated. A credit score can be improved.

For more on credit scores, visit FDIC Explains Credit Scores.

What factors go into a credit score?

Among the criteria for determining a credit score are:

  • Your bill-paying history, current unpaid debt, and the number and type of loans and accounts you have.
  • How long you have had your loan accounts open and how much of your available credit you’re using.
  • If you have had a debt sent to collection, a foreclosure, or a bankruptcy, and how long ago was it.
  • Whether you recently applied for new or more credit.

Why is a good credit score important?

A scoring model uses information from your credit report to create a credit score.

With a good credit score you could be offered better loan terms than someone with a poor credit score, such as a lower interest rate or more time to pay back your loan.

A low credit score indicates that there’s a higher risk that a person won’t repay a loan.

Landlords may look at your credit scores because they want to know if you’re likely to pay your rent on time. Some prospective employers also consider credit scores when hiring.

Credit reporting agencies provide guidance on what a good score is.

You can check with your lender on their credit score requirements.

Can I influence my credit score and my credit report?

How you manage your loans significantly influences your credit score. To achieve and maintain good credit scores, consider the following:

  • Make sure you pay your bills and debts on time.
  • Create a budget. Track when your payments are due, how much is due, and how much money is coming in each month to help you stay on track. For suggestions on how to create a budget, see “FDIC Consumer News” February 2019.
  • Pay down your debt. Having loan and credit card balances at their limits are expensive and can have a negative impact on your credit score. Use a strategy such as paying the lowest balance debt off first, then pay the next lowest debt you owe so you can pay it off faster, and so on. Another common strategy is to pay off the debt with the highest interest rate first so all of your money is paying down your debt, not just paying interest.
  • Keep a credit card that you have had for a long time. It will probably help your credit score after you’ve paid it off.
  • Call your banker or creditor right away if you can’t make your loan or credit card payments. They may be able to help you with a solution before it becomes a problem that affects your credit score. Don’t be afraid to reach. For information on working through financial difficulties, visit “FDIC Consumer News” July 2020.
  • Borrow money only for things you need. Make paying down or paying off your loans and credit cards a priority, before adding new debt.
  • Shop for credit only when you need it. Making numerous applications for loans is also reported to credit reporting agencies, and may lower your credit score.
  • Monitor your credit report. You can receive a free credit report annually from all three of the major credit reporting agencies: Equifax, TransUnion, and Experian. Learn how to at Consumer Financial Protection Bureau.
  • Fix any errors you find on your credit report. Visit “FDIC Consumer News” October 2018.

How do I get credit if I don’t have a credit history?

You start small and build a credit history by doing one of the following:

  • Get a secured credit card. A secured credit card works like a credit card, but usually starts with a low limit, such as $400. You deposit money with the bank, usually the same amount as your credit limit. You need to pay the minimum payment, and if you fail to make it, the bank will use part of your deposit to make your payment. Be sure to get the card from a bank that will report it to the credit reporting agencies, so you begin to build your credit history.
  • Start by getting a traditional credit card with a low credit limit and co-signer. The co-signer will be required to make the payments if you don’t, so it’s important that you make your payments on time. Also, late payments will result in a low credit score. If you have paid on time for an extended period, your score will improve and your bank may increase your credit limit.

Be sure to find out the terms, including any fees and penalties, whether you get a secured credit card or a traditional credit card. This will help ensure that the credit card you select, and the way you use it, enhances your credit history.

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