Credit reports and credit scores

By America Saves

A credit report looks at some of your bill paying history, public record information, how often you have applied for credit, and how you have used credit. It shows how much credit you have, how much of your available credit you are using, whether you have made your payments on time, and whether debt collectors have reported that they are attempting to collect debt that you owe.

Credit scores are calculated using the information in your credit report, and many lenders use them to decide how much money they can lend you and how much interest to charge.

Why do credit reports and scores matter?

A good credit history can help you:

• Get and keep a job.
• Get and keep a security clearance for a job, including a military position.
• Get an apartment.
• Get insurance coverage.
• Get lower deposits on utilities and better terms on cell phone purchase plans.
• Get a credit card.
• Get a better credit score.

If any of these things are important to you, improving your credit report can help you get them.  Scores are calculated based on the information in the report – so at least once a year, take the time to make sure the information in your report is accurate. You can get one free copy of your report every 12 months at www.annualcreditreport.com. 

What are credit scores and how are they calculated?

Credit scores are numbers created by mathematical formulas that use key pieces of your credit history to calculate your score at a moment in time – like a photograph.  FICO and VantageScore are two of the most commonly used credit scores. These scores typically range from 300 to 850. A FICO score above 700 is considered good by most businesses, and the scores considered the best are 750 and higher.

While there are certain similarities and many differences in the credit score formulas, here is information that FICO makes available to the public on what goes into its scores:

• Payment History: 35%
• Amounts owed: 30%
• Length of credit history: 15%
• New credit: 10%
• Types of credit used: 10% 

Payment history tracks whether you are paying your bills on time and as agreed. Paying bills late, not paying bills at all, and having bills that go to collections will cause your scores to drop. The impact on a score from a single late or missed payment decreases over time. Paying your bills on time can help increase your score. Debts that go to collections and to judgment will cause it to fall.

To get and keep a good credit score:

• Pay all your loans and bills on time. A good way to ensure this happens is to have money put aside in a savings account in case a bill is higher than expected one month or you had an emergency that used money you had planned to use for bill paying.  Saving a portion of your tax refund and having some funds automatically deposited from each paycheck into a savings account are easy ways to make sure you always have sufficient funds to make timely payments.
• Make sure information in your credit report is correct. Check your credit report annually and take steps to correct mistakes. 
• If you currently have access to credit, don’t use too much of the credit that is available to you.

For more information on credit scores and reports, visit: www.consumerfinance.gov/ask-cfpb/category-credit-reporting/

Lynn Weckworth works for United Way of Northern New Jersey, a nonprofit coordinator of Northern NJ Saves. Some of the content in this blog has been excerpted from the Consumer Financial Protection Bureau’s Your Money Your Goals