CHAPTER
4

Your Credit History, Report, and Score

In This Chapter

• Why you need a credit history
• Avoiding problems with credit and debt
• Getting help for and fixing credit and debt problems
• Understanding your credit report and score

Many people don’t realize their credit history is carefully documented in a credit report—which, by the way, usually contains some very personal and specific information.

So let’s start at the beginning and see exactly what a credit history is, how you build it, and what it’s used for. Then you’ll be able to understand why it’s so important and how it can affect many areas of your life.

Building Your Credit History

When you applied for your first credit card (probably back in high school or college), your name and a lot of personal information were entered into a computer, and your credit history began. Since then, every time you applied for another credit card or a store card, took a vacation loan from your bank or credit union, or applied for a car loan, information was added to your credit report.

Your credit history is the record of everything pertaining to any credit you’ve ever had or applied for, all summarized in your credit report, which lists your credit score.

Definition

Your credit history is a record of all the credit you’ve ever had or applied for. Details of your credit history are documented extensively in a credit report. Your credit score is a number based on data in your credit report and represents your overall creditworthiness.

If you want to borrow money for a car, a house, a vacation, debt consolidation, college, or a business, you’ll need credit. If you go to a bank to borrow money and have no history of ever having any credit, you don’t stand a good chance of getting the loan. The bank will be reluctant to take a chance on you because it has no indication of whether you’ll pay back the money or default on the loan.

Credit cards used to be issued freely to nearly anyone who wanted one, but card issuers have become much more selective in recent years. Due to high rates of student debt, more stringent industry regulations, and other factors, many millennials who apply for credit cards are denied—something that actually can end up hurting their credit scores.

Of those who do have cards, they tend to use them hard, often maxing out their limits, which can result in higher interest rates. All these factors can create a difficult situation if you’re trying to establish a credit history.

In the next chapter, you learn about identifying and scoring a credit card or two that fits your lifestyle and financial situation. Even though many millennials seem to have complicated relationships with credit cards, you’ll need to have at least one in order to establish a credit history.

After all, that old car you’ve had since your freshman year isn’t going to last forever. And there may be a time when you’d like to trade in your apartment for your own house, or maybe even start your own business.

Pocket Change

NerdWallet, a personal financial information site that provides online credit card comparison tools, reports that many people in their 20s and 30s—about 30 percent—have never even had a credit card. That would have been unheard of a generation or two back, when getting a credit card was considered a rite of passage.

Fortunately, it’s not that hard to establish a credit history. If you can get a credit card, you will build a history. The trick is to develop and maintain a healthy one.

When Enough Is Enough

When you have a credit card and have been using it and making on-time payments for a while, it’s easier to get more cards. For some people, that can lead to serious problems because they can’t avoid the temptation to spend and get in over their heads with debt.

If you can’t keep up with the payments on all your cards, your credit history will show you as high risk. When you go to apply for loans, you won’t be regarded as a good candidate, and you’ll have unnecessarily put your credit rating in jeopardy. Having too many open lines of credit (credit cards) also can be harmful to you when you apply for a loan. Lenders want to feel secure that your debt is under control—that you are managing your finances responsibly.

You’re much more likely to be approved for a loan if you have a good record of paying off debt on a few credit cards, or even one card, than you would after you’ve been bogged down with a dozen cards that got away from you. Keep in control of your credit cards and your debt, and be sure your payments are on time. Know when enough is enough, and establish a good, responsible record of repaying debt.

When to Get Help

Some people get so far into debt trouble it’s extremely difficult to fix, and it negatively affects their credit score for years and years. If you think you’re having trouble managing your debt, it’s very important to acknowledge the problem early and take immediate steps to fix it.

Overspending has serious consequences and can be a true addiction, just like drinking or gambling. If you think you can’t stop spending, and you’re incurring more debt than you can handle, get some help.

You can contact Debtors Anonymous at debtorsanonymous.org or seek help from a counselor who specializes in financial recovery. Some work for nonprofit organizations, and their services can be obtained at no cost. Check online for local listings.

The best-known and most widely used score is the FICO score, which is based on a system developed by Fair Isaac Corporation. The mathematical equation used to calculate your score takes into account 22 pieces of data from your credit report, and the resulting number identifies you either as a low-risk or high-risk candidate for a lender.

Why Your Score Matters

A potential lender looks at your credit report and your credit score when deciding whether or not to give you a loan. The lower your score, the less likely it is you’ll be offered a loan. If you are offered one, it undoubtedly will come with a higher interest rate or more restrictive terms.

Dollars and Sense

Increasingly, employers are checking out the credit reports of prospective employees before hiring. It’s standard practice in some job areas, such as the defense, banking, financial, and medical fields, but other employers also are engaging in the practice. If you’re turned down for the job because of something in the report, you’re required, under federal law, to be notified of your right to get a copy of the report at no charge.

FICO scores are regarded as providing the best guides to future risk based solely on credit report data. The scale ranges from 300 (the lowest) to 850 (the highest). Lenders look most favorably to those whose scores are 740 or higher. The general rule of thumb is that the higher your score, the less risk you pose to a lender. Historically, people with high FICO scores have repaid loans and credit cards more consistently than people with low FICO scores. Although there’s no single “cutoff score” used by all lenders, it’s important to know and understand your score.

Your credit score has quite an effect on the interest rates available to you when you want to borrow money. An example of mortgage rates available for different FICO score averages are shown in the following table.

With many younger people saddled with significant college debt and credit still fairly tight, mortgages and other loans recently available to those with credit scores below 640 won’t be as readily available in the future. Therefore, it’s very important to maintain good credit or improve your credit score if necessary.

You can work to improve your score by paying off credit cards, getting rid of excess cards and using only one or two, and paying all your bills by the due date. Over time, your credit score should increase.

How Your FICO Score Is Determined

Your credit rating is calculated by compiling information in five categories:

• Your payment history constitutes 35 percent of the rating. One or two late payments won’t make a difference in your score, but a pattern of late payments will.
• The duration of your credit history counts for 15 percent of the rating.
• The amount of new credit counts for 10 percent, so watch how many credit cards you sign up for.
• The types of credit you’ve used (think home equity as compared to an uncollaterized loan) factor in for 10 percent.
• The debt you have counts for 30 percent.

Income is not a factor in determining FICO scores.

Usually, the FICO score is given with four reason codes, in order from the strongest negative reason to impact your score, the second strongest factor, and so on. It’s important to understand how you scored, so be sure to review your credit report at least once a year and especially before making a large purchase, like a house or a car. If your score isn’t what you’d like it to be, work to improve your score.

Several major factors can affect your credit score:

Your level of revolving debt This is one of the most important factors considered for the FICO score. Even if you pay off your credit cards each month, your credit card may show the last billing statement in relation to your total available credit on revolving charges. If you think your FICO score should be higher, work to pay down your revolving account balances.

Shifting balances Don’t shift your credit card balances from one card to another to make it appear that you’re being diligent about paying off debt. And don’t open new revolving accounts. These tactics won’t improve your credit score.

The length of time your accounts have been established This can hurt you when you’re first starting out, but consumers with longer credit histories tend to be lower risk than those with shorter credit histories.

Too many accounts with balances Too many credit card accounts with balances is a dangerous sign that you won’t be able to make that many payments should your employment status change.

Too many credit inquiries within the last 12 months Borrowers who are seeking several new credit accounts are riskier than persons who aren’t seeking credit, although these have only a small impact on your FICO score. Inquiries have much less impact than late payments, the amount you owe, and the length of time you’ve used credit.

Your personal credit report includes information such as your name, Social Security number, date of birth, your address from the time you first got a credit card until now, everywhere you’ve worked during that time, and how you pay your bills. Whenever you apply for a loan or for credit, the place at which you applied will check out your report with a credit agency. In turn, it will give the credit agency any additional information it’s picked up on you.

Pocket Change

Each of the top three credit agencies, Equifax, TransUnion, and Experian, probably has the same information about you and your credit history. They get it from banks, finance companies, credit card suppliers, department stores, mail-order companies, and various other places that have had the pleasure of doing business with you. Smaller, regional credit bureaus supplement the information.

The Fair Credit Reporting Act limits who can see your credit report. Of course, the list is pretty long, but it does set some guidelines. Your credit report can be released by a reporting agency under the following circumstances:

• In response to a court order or a federal grand jury subpoena
• To anyone to whom you’ve given written permission
• To anyone considering you for credit or collection of an account
• To anyone who will use the report for insurance purposes
• To determine your eligibility for a government license or benefits
• To anyone with a legitimate business need for the report in connection with a business transaction with which you’re involved (This includes your landlord when you apply to rent an apartment as well as the cell phone and utility companies.)

When you realize how often your credit report can be accessed, you can begin to see how important it is that you keep it clean. But even if your credit record is perfect, your report might not be, and that could affect your credit score. With so much credit information floating around out there, it’s easy for mistakes to be made with that information. Human error is a big factor, and somebody who misreads some information about you can mess up your credit report royally. A study showed that one out of four people who took the time to thoroughly review their credit reports discovered a mistake that eventually was corrected.

You’re going to learn more about why it’s important to keep an eye on your credit report and exactly how to go about getting a copy of it.

Pocket Change

Be aware that every time an inquiry is made for your credit report, it’s automatically logged into your report. Although this isn’t necessarily bad, numerous inquiries may need to be explained to a potential lender.

Getting a Copy of Your Credit Report

Even if you don’t plan to apply for a car loan, mortgage, or credit card anytime soon, it’s a good idea to take a look at your credit report once a year. You can get a copy of your report from Annual Credit Report (annualcreditreport.com), which summarizes your credit reports from each of the three largest credit bureaus:

• Equifax Credit Services (equifax.com)
• TransUnion Credit Information Services, Consumer Disclosure Center (transunion.com)
• Experian (experian.com)

You can get the report for free, but you’ll have to pay a fee if you want to know your FICO score. Unless you’ve experienced credit problems, there’s no need to get your score every year; the report will suffice.

Dollars and Sense

Experts recommend you read your credit report carefully about once a year, especially before you apply for credit or when you know the credit report will be checked (as when you rent an apartment). This is the only way to be sure no mistakes have been made that will damage your credit record.

You also can get your credit report by contacting any of the three credit agencies. When requesting your credit report from any of these agencies, be prepared to provide your name, address, Social Security number, and maybe your date of birth as identification.

When you receive your report, look it over carefully. If you discover a mistake, contact all three credit agencies by certified mail, inform them of the mistake you’ve discovered, and request that they investigate. If you don’t get a reply within 60 days, send another letter. Remind the companies that they are required by law to investigate incorrect information or provide an updated credit report with the incorrect information removed. With financial breeches and identity theft at an all-time high, you need to be vigilant and scrutinize your report for anything that doesn’t look right.

Dollars and Sense

You have a legal right to submit a letter up to 100 words long to the credit agency, disputing something you’ve discovered on your credit report. The letter must be included in your file. If you do this, be sure your letter is clear, concise, and to the point.

If you see information you don’t like on your credit report that, unfortunately, isn’t a mistake, don’t despair. The Fair Credit Reporting Act mandates that negative information on your report be removed after a certain period of time. Even if you declare bankruptcy, that information is supposed to be removed from your report after 10 years. The trick, of course, is keeping your credit report healthy and in good shape. In this case, preventive maintenance works best.

The Least You Need to Know

• It pays to be aware of your credit history because it affects so many areas of your life.
• Despite how you feel about credit cards, you’ll need one or more to establish a credit history for your future.
• It’s not how much credit you have, but how you handle it, that affects your credit history.
• Recognizing credit and debt problems early and getting help if you need it can stop the situation from getting out of control.
• You should know what your credit report contains, how you can get a copy of it, and ways to correct mistakes when necessary.