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Do you have a handle on what your credit score consists of, how you can increase it, and why it’s important? If not, this guide is here to help! Understanding credit is essential for young people as it affects everything from buying a car or house to applying for jobs. Here we will discuss the three major credit bureaus, your FICO score, the 5 C’s system of lending, and free options to check your credit scores.
What is Credit?
Credit has revolutionized the way we live. Instead of relying on cash transactions, credit allows us to pay for goods and services on credit, with the promise to repay it later. It is a win-win situation for both parties involved, as credit enables businesses to grow by accepting payments from consumers, while credit also helps consumers shop for essentials without having to save up money in advance. Managing credit properly is important too; credit scores measure creditworthiness and impacts our ability to secure loans or credit cards, so keep an eye on your credit score if you want the best financial products.
Benefits of Understanding Credit
Understanding your credit is super important for understanding where you stand financially, so it’s definitely a great idea to pull your credit report! On the plus side, understanding the terminology and how your score works can make all the difference when it comes to borrowing money. Your credit score is a three-digit number that speaks volumes about your financial behavior, and understanding what factors influence it will help you make informed decisions. After all, having better understanding of credit can also get you access to lower interest rates, so it pays off in more ways than one!
The Three Major Credit Bureaus
Equifax, TransUnion, and Experian are the three major consumer reporting agencies in the United States. They gather data related to loans, payment history and other financial information about individuals and businesses. This data is then used by lenders when evaluating loan applications. Equifax holds approximately 40% of all consumer credit records in the US; TransUnion holds 35%, and Experian holds 25%. It’s important to know that each bureau may have different information about you due to errors or discrepancies with creditors. That’s why obtaining copies of your reports from all 3 bureaus is critical for getting a full picture of your overall financial health. You can obtain one free copy from each bureau annually through AnnualCreditReport.com.
How to Obtain Your Free Credit Report
Getting a credit report just got much easier with the new COVID regulations! Now, you can request a free report once a week from the big 3 credit bureaus: Equifax, TransUnion and Experian. Whether it is through the internet or by phone or mail, getting credit reports from the credit bureau has never been so easy. Say adios to long forms, pricey credit reports and waiting for weeks for credit score and reports – this really is living in the 21st century! Check your credit now and take advantage of a great opportunity.
There are three ways to request your free reports:
- Online: Visit AnnualCreditReport.com
- Phone: Call 1-877-322-8228
- Mail: Download and complete the Annual Credit Report Request Form. Mail the completed form to:
Annual Credit Report Request Service
P.O. Box 105281
Atlanta, GA 30348-5281
You have the option of requesting all three at once or requesting one at a time. I usually pull all three at once via the website. It is pretty straight forward and just a matter of a few clicks.
Credit Score and What It Means for You
Your credit score is a numerical representation of your overall creditworthiness based on several factors such as payment history, amount owed and length of time having had credit, among others.
What are the different credit scoring models?
The most commonly used credit scoring models are FICO and VantageScore, both developed by the three major credit bureaus. FICO credit score ranges from 300 to 850, while VantageScore 3.0 credit score ranges from 300 to 850 and 4.0 from 501 to 990.
FICO utilizes a complex algorithm that takes into account a variety of factors, including payment history, credit utilization, number of credit accounts and types of credit. VantageScore 3.0 considers similar criteria as FICO but weighs them differently. VantageScore 4.0 also takes into account rental payments which are not included in the FICO model.
We will focus on the FICO credit scoring model for this article. A good credit score is considered anything 600 or better. Bad credit scores are anything below that.
How is a FICO credit score measured?
When it comes to credit, credit scores are a measure of how creditworthy an individual is. The FICO score measures different aspects of credit history, such as payment history (35%), amount owed (30%), length of credit history (15%), recent applications for new credit lines (10%) and types of credit used (10%). These factors supposedly illustrate an individual’s creditworthiness and capability of handling credit properly. So before procuring credit, make sure everyone does their homework to understand the credit score system, and check their credit score regularly for accuracy!
What is payment history?
Payment history is one of the most important factors when it comes to credit reports and scores. Payment history is simply a record of whether an individual has been making their payments on time or not. It includes things such as late payments, missed payments, defaults and bankruptcies. Your payment history accounts for 35% of your FICO score, so it is important to keep up with payments and ensure that you make all payments on time. Late payments can cause a significant drop in your credit score.
What is the amount owed?
The amount owed is the total amount of debt an individual has. This includes the balance on credit cards, loans, mortgages and other types of credit accounts. This accounts for 30% of your FICO score and measures how much debt is owed relative to the total amount of credit available. High balances can lower credit scores, so it is important to keep debt balances low and make payments on time.
What is the length of credit history?
The length of credit history is the amount of time an individual has had an account open. This accounts for 15% of your FICO score and measures how long you have been using credit responsibly. Generally, the longer your credit history is, the better. A long and consistent record of good payment habits will help to increase your score.
What are recent applications for new credit lines?
Recent applications for new credit lines refers to any applications for new credit lines in the past 12 months. This accounts for 10% of your FICO score and measures how recently you have applied for new credit. Applying for too much credit at once can lead to a drop in your score, so it is important to be judicious with credit applications.
What are the types of credit used?
The types of credit used is a measure of the diversity of your credit portfolio. This accounts for 10% of your FICO score and looks at the mix of credit that you have. A good mix includes installment loans, such as auto loans or mortgages, and revolving credit, such as credit cards. It is important to have a mix of different types of credit in order to maximize your score.
The 5 C’s System
The 5 C’s system is an assessment method used by lenders when evaluating loan applications such as mortgages or auto loans. The 5 C’s character, capacity, capital collateral & conditions are evaluated in order to determine if an applicant qualifies for a loan or line of credit they are applying for:
What is character?
Character evaluates whether an applicant has good reputation. It looks at factors such as creditworthiness, financial responsibility and stability. This is evaluated largely through credit reports and scores, so it is important to make sure your credit reports and scores are up to date.
What is capacity?
Capacity evaluates an applicant’s ability to repay the loan. It looks at things such as income, job stability, debt-to-income ratio and other types of financial obligations. Lenders may also look at a borrower’s credit utilization ratio, which is the amount of available credit that they are using.
What is capital?
Capital evaluates an applicant’s financial resources and assets. This includes things such as savings, investments, cash reserves and other types of liquid assets. Capital is used to assess the borrower’s ability to make a down payment or pay off their loan in case of an emergency.
What is collateral?
Collateral evaluates an applicant’s assets which can be used to secure the loan if they default on their payments. This includes things such as a home or car. Lenders may require collateral in order to approve the loan, and it may be necessary for certain types of loans such as mortgages.
What are the conditions?
Conditions evaluate any external factors which could impact an applicant’s ability to repay the loan. This includes things such as a change in interest rates, economic conditions, or changes in regulations. It is important to be aware of any changes in the market which could impact your loan.
Knowing this system can help you understand what lenders are looking for in an application so you can ensure yours meets their criteria before submitting it!
Free Options to Check Your Credit Score
Checking your credit score is something that should be done regularly to ensure the protection of your financial wellbeing. Thankfully, there are now several ways to check it for free; Credit Karma is a great example and allows consumers to check their credit score with no charge. Also, many banks offer customers the opportunity to check their credit report on an ongoing basis without incurring a cost. So don’t put off checking your credit score – keep yourself in the know and get it done for free!
What Are Some Things I Can Do Now?
Ok, so now we know what’s on our credit and our credit score. Let’s clean it up a little! I want to start with collection accounts since they are the most detrimental to your score. Never pay anyone to do this for you! It is pretty simple and I am going to walk you step by step.
1. Call the creditors
I must admit this is the most daunting task but you have to get it done. On your credit report, it will tell you who is reporting the debt and their contact information. This step is just for fact-finding. You do not want to mention anything about paying the debt. Remember when I told you collection accounts fall off after 7 years? Well, if you mention that you will pay, that 7 years will start all the way over! Keep the conversation short and simple. The conversation should go something like this: â€‹
You: Hello, I was checking my credit report and noticed that (insert company here) was listed. I wanted to see what this was about.
Them: Sure, let me just pull up your account… OK, I see that there is an outstanding balance that is in collections.
You: How much is the balance? Is that the only balance showing?
You: OK, thank you so much for your help. Have a good day!
Please make sure you write this information down. You are going to have this conversation with every single credit collection company showing on your report. Once you have confirmed all of the balances, you have two options. You can either (a) wait until they fall off by themselves after 7 years or (b) pay them off. Depending on how long they have already been there, you can make that determination. Just know that your credit score will not improve until they are gone!
The upside to collection companies is that they have bought your debt from the original company for pennies on the dollar. This puts you in a position to negotiate. For demonstration purposes, one of your debts according to the collection company is $1000. You currently only have $700 in your account to use to pay this debt off. Offer it! 9 times out of 10, they will accept whatever they can get as long as it is reasonable. If you go this route, please make sure you get something in writing from the company stating that the debt has been satisfied. If you skip this important step, they can act like they have no idea what you are talking about and later try to collect on the debt again. When you have the payment conversation, be sure to confirm that the account will be removed from your credit report.
3. Dispute what you can
All three credit bureaus give you the option to dispute what it is on your credit report. Use this option if you call the creditors and they don’t have the accounts anymore. I have had this happen with a few of my accounts. The process to dispute is very simple!
Transunion – https://dispute.transunion.com
Experian – https://www.experian.com/disputes/
Equifax – https://www.equifax.com/personal/disputes
Whether you pay off the balances or dispute items, it will take a month or two for it to properly reflect on your report. It will not happen immediately! Sit back, congratulate yourself, and wait for your credit score to improve.
Keeping track of our finances can seem overwhelming at times but understanding our own personal finances is essential regardless our age! Whether we’re just starting out building our financial foundation or already well established it’s never too late start learning more about how our finances work- especially when it comes to understanding something as important as our own personal credit rating & history! With this guide under your belt & knowledge in hand there’s no excuse not taking charge & starting clean up today!
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What are some common credit myths?
Some common credit myths are that checking your credit score will hurt it, that carrying a balance means better credit, and that closing credit cards improve credit. None of these are true, as checking your credit score only shows you information and doesn’t affect it, carrying a balance won’t help your credit score, and closing credit cards can actually hurt your credit score.
What should I do if I have bad credit?
If you have bad credit, the first thing you should do is check your credit report to make sure it’s accurate and up to date. From there, you should contact any creditors that are listed and try to negotiate a payment plan. You can also work on building positive credit by using a secured credit card and making on-time payments. Finally, make sure to keep track of your progress and monitor your credit report regularly.
What are some common credit mistakes to avoid?
Some common credit mistakes to avoid include maxing out your credit cards, missing payments, and applying for too much credit at once. Maxing out your credit cards can hurt your credit utilization ratio, missing payments will damage your payment history and lower your score, and applying for too much credit at once can be seen as a sign of financial distress. Therefore, it is important to keep your credit card balances low, make timely payments, and only apply for the credit you need.
What can I do to improve my credit score?
There are several things you can do to improve your credit score. The most important things to do are to make sure your credit report is accurate, pay off any outstanding debts, and keep up with on-time payments. You can also use a secured credit card and make small purchases that you pay off right away to help build positive credit. Finally, keep track of your progress, and monitor your credit report regularly.