All decisions have consequences. And one way that we feel the consequences of our financial decisions is through our credit score and credit report. While many people are likely familiar with the terms, how they are calculated and what can be done to improve them is not widely understood. However, small improvements in a credit score and a clean, accurate report can have a big impact on your ability to borrow money at a low interest rate. CPAs from the Oregon Society of CPAs break down what you should know about your credit score and credit report.
How is a credit score calculated?
Your credit score is essentially a rating of your creditworthiness — which means it informs lenders of how risky it may be to make a loan to you. The one most frequently used is a FICO score, which ranges from 300 to 850. And higher number translate into greater credit worthiness.
- Your payment history, including late payments or delinquent credit lines, accounts for 35% of the score.
- How much money you owe contributes 30% of your credit score.
- The length of time you’ve had accounts for 15%.
- The type of credit accounts — for example, retail accounts, credit cards, home or auto loans – makes up 10%
- The amount of new credit you have comprises 10% of your score.
Lenders view generally view anything over 670 as being a good score. However, to truly be considered a safe and dependable borrower and qualify for better rates, you should aim for a score over 740.
To improve or maintain your score, make sure you’re making all payments on time and you have a good mix of credit. Late payments and delinquent accounts can quickly bring your score done, so if you are unable to make a payment it is much better to call your lender and see what your options are than to just skip the payment.
What’s in a credit report?
Lenders also use credit reports in their lending decisions. And each consumer has the right to request one free credit report every 12 months from each of the ‘big three’ credit bureaus (Equifax, Experian and TransUnion). These reports may not include your credit score, but many financial institutions will provide you with your credit score for free, so there is no need to pay for it.
It’s a good financial habit to check your credit reports regularly. This ensures they are accurate and also gives you an opportunity to alert the credit bureaus if you find an error or signs of possible identity theft or anything that is in error. Typically, these reports cover:
Personal information, including name, address, Social Security number, telephone number, employer, past address and past employer, and information about your spouse, if applicable. It is important to review this information in detail and ensure that it is accurate.
Account details. The report will list all your accounts, along with information on the name of each lender; the account number and type of account; when the account was opened; the highest balance outstanding that you’ve had; the current balance; the terms of the account; and your payment history. For example, it will show whether you’ve been late, and if so, how late. If the report includes open accounts you don’t use anymore, contact the companies involved and ask them to close the account.
Credit issues. These might include any bankruptcies you had in the past, or any accounts that were sent into collection for non-payment for example. If any of these are listed
Information on who has requested your credit information during the past 24 months. These inquiries usually occur either when you apply for credit or if a credit card company wants to offer you an account.
Why your Credit History Matters
Lenders — whether they’re giving you a mortgage, providing financing on a car or offering you a credit card — need to determine if they want to lend you money. They do this by checking your credit reports and score. If you have a low score or problems in your credit report, you may have trouble finding a lender who will lend to you or you may have to pay a high interest rate to get credit.
By opening accounts and using them within your ability to pay back on time, you’ll begin to build up your credit score. And by ensuring your credit report is up to date and accurate, you’ll be giving lenders as accurate a picture of your credit worthiness as possible.
Money Management is a regular column on personal finance prepared and distributed by certified public accountants, produced in cooperation with the Oregon Society of CPAs (www.orcpa.org) and the American Institute of CPAs (www.aicpa.org). Copyright 2019 The American Institute of Certified Public Accountants.