Credit Scores/Credit Bureaus/Credit Reports
A credit bureau (also called a credit reporting agency) gathers, maintains, and sells information about your credit history. It collects information about your payment habits from banks, savings and loans, credit unions, finance companies, and retailers. That information is gathered into credit reports that are used by creditors or lenders.
Your credit report contains your credit history. It includes all of your loan and credit card accounts and details specific account information, such as the date opened, credit limit or loan amount, balance and monthly payment. It also includes late payments, bankruptcies, liens, and collection agency attempts to collect past due amounts. It's important to maintain a good credit history. (Financial experts advise checking your credit report once per year for inaccuracies.) A good credit history means you're eligible for the best rates, whereas a poor credit history subjects you to higher rates and possibly being turned down for credit.
Because of a 2004 Federal law, you'll soon be able to get a free copy of your credit report every year from each of the three major credit reporting agencies (see addresses below). Eligibility for free yearly reports is being phased in on a state-by-state basis and should be complete by September 1, 2005.
Your credit score is a number that reflects your financial responsibility and helps lenders decide if you're a good credit risk or not. Your score is based on - but not part of - your credit report. It's generated at the time of request, then included with the report. There are five major factors that determine your credit score. They are:
Payment History: (approximately 35% of your score) The factor that has the biggest impact on your score is whether you've paid past credit accounts on time. However, an overall good credit picture can outweigh a few late payments, and late payments will continue to have less impact over time unless the late payment is a mortgage payment.
Amounts Owed: (approximately 30%) Having credit accounts and owing money doesn't mean you're a high-risk borrower. But owing a lot of money on numerous accounts can suggest that you are financially overextended and more likely to make some payments late or not at all. Part of the science of scoring is determining how much debt is too much on a given credit profile.
Length of Credit History: (approximately 15%) In general, a longer credit history will increase your credit score. It shows that you can responsibly manage your available credit over time. However even people who have not been using credit very long may get high scores, depending on how the rest of their credit report looks.
New Credit: (approximately 10%) People today tend to have more credit and to shop for more credit and to shop for credit more frequently. But opening several credit accounts in a short period of time can represent greater risk - especially for people with short credit histories. Requests for new credit can also represent greater risk. However, credit scores are able to distinguish between a search for many new credit accounts and rate shopping. Credit scores generally do not equate your rate search with higher credit risk.
Types of Credit Use: (approximately 10%) Your credit score will reflect a combination of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. While a healthy mix will improve your score, it is not necessary to have one of each and it is not a good idea to open credit accounts you don't intend to use. The credit mix usually won't be a key factor in determining your score, but it will be more important if your credit report doesn't have much other information on which to base a score.
Your credit score lists up to four reasons why your score is not currently higher. These reasons can be very useful in helping you determine how you might improve your score over time, and whether your credit report might contain errors. If you already have a high score, say over 725, some of the stated reasons for credit concerns may not be very helpful, as they may reference the factors that have the least impact on your score, such as length of credit history, new credit and/or types of credit in use.
Ways to Improve your Credit Score
1. Pay your bills on time. It's the best way to improve your score, and it's never too late to start. Even if you've have serious delinquencies in the past, these will count less over time.
2. Keep credit card balances low. High outstanding debt can pull down your score.
3. Check your credit report for accuracy. There may be inaccurate information on your credit report that can be easily cleared.
4. Pay off debt rather than moving it around. Consolidating your credit card debt onto one card or spreading it over multiple cards will improve your score in the long run. The most effective way to improve your score is by simply paying down the amount you owe.
5. Keep your credit cards but manage them responsibly. In general, having credit cards and installment loans that your pay on time will raise your score. someone who has not credit cards tends to have a lower score than someone who managed credit cards responsibly.
6. Don't open multiple accounts too quickly, especially if you have short credit history. This can look risky because you are taking on a lot of possible debt. New accounts will also lower the average age of your existing accounts, something that your credit score also considers.
7. Don't open new credit card accounts you don't need. This approach could backfire and actually lower your score.
8. Don't close an account to remove it from your record. A closed account will show up on your credit report and may be still factored into the score. In fact, closing accounts can sometimes hurt your score unless you also pay down your debt at the same time.
9. Shop for a loan within a focused period of time. Credit scores distinguish between a search for a single loan and a search for many new credit lines, based in part on the length of time over which recent request for credit occur.
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