Consumer Credit Questions – FAQs on Credit Reports and Scores

Do you have questions about credit reports and scores? If so, you’ve come to the right place. We have compiled some of the most common credit questions we have received over the years through the Home Buying Institute (our sister website). Most of these Q&A sessions have a real estate focus. They explain the connection between credit, mortgages and home buying.

1. Why is credit important to consumers?

Like most modern economies, the U.S. economy is based heavily on credit. We get loans to pay for things, and then we pay those loans back over time. A person’s credit score is basically a record of how well they have managed their finances in the past, and it will determine their ability to qualify for loans in the future (such as car loans, mortgages, etc.). If you can afford to pay cash for everything, then credit does not matter much to you. But for most of us, a good credit score is the key to financing.

2. Where does my credit score come from?

It comes from your previous financial activity — how you pay your bills, how many credit accounts you have, etc. There are three main pieces of the puzzle. (1) The consumer credit bureaus Experian, TransUnion and Equifax are the companies who maintain data on consumers. (2) This data is maintained in a credit report, and you have one report for each of the companies mentioned above. (3) These reports are converted into numerical credit scores, and this is what lenders use when considering you for a loan. So your financial activity is captured in the form of a credit report, and that document is used to produce your credit score.

3. How can I get copies of my credit report for free?

Ah, now we get to one of the most confusing topics of all. This is one of the most common credit questions today, and it’s easy to understand why. Here’s the bottom line. By law, you are entitled to get a free copy of your credit report once a year, from all three of the companies mentioned above. You can request all three of them at once by visiting AnnualCreditReport.com. There are hundreds of other websites that offer “free” credit reports, but they usually require you to sign up for some kind of identity theft prevention / monitoring service.

4. Can I get my credit score for free also?

Not that I’ve seen. You can get your reports for free (with no strings attached) through the website listed above. But I have yet to see a website that gives credit scores for free. You’ll see plenty of offers for free reports and scores, but they usually require you to sign up for some kind of monthly service like an identity watch / credit monitoring service. With that being said, you can purchase your score for pretty cheap, probably in the neighborhood of $15 – $20.

Credit.com is the website I usually recommend for this kind of purchase. Check them out here: Get all three scores from Credit.com

5. What’s included in my credit report?

These documents include a lot of information, but most of the important items fall into one of three categories:

• In the personal information section, you’ll find identifying info such as your name, your social security number, you last known address and similar items. Your name and SSN are the most important things to review in this section (for accuracy).
• In the public records section of your credit report, you’ll find information related to court judgments such as foreclosures and bankruptcies.
• In the accounts section, you’ll see a list of credit accounts along with the status of each account. This will include credit cards, bank accounts, car loans and the like.

Your credit report will also include information about debt collections, late payments, and charge-offs resulting from your failure to pay. As with bankruptcies and foreclosures, these items can do serious damage to your credit score. That’s why it’s important to pay all of your debts on time — failing to do so can come back to “haunt” you later on.

6. What’s considered a good credit score?

This is a hard credit question to answer, because “good” is such a subjective term. So let’s break down in terms of mortgage qualification. While there are many levels of credit, a consumer’s score can be loosely categorized in one of three ways — bad, good and excellent.

• Having a bad score means you’ll be unable to qualify for a mortgage loan — and if you do get qualified, you’ll end up paying a relatively high interest rate on the loan.
• A good credit score means you can qualify for a loan with a decent interest rate.
• With an excellent score, you would probably qualify for the best rates the lender has to offer.

In the current economy, you’ll probably need a FICO credit score of around 760 to get the best rates. The important thing to keep in mind is that different lenders have different standards. The only way to know what kind of interest rate you can get is to apply for a mortgage quote with multiple lenders.

7. What determines my credit score?

We have already talked about the fact that your score is based on the information found within your reports. In particular, there are five kinds of data that account for most of your credit score. The scoring chart below shows these five key areas.

As you can see from this chart, your history of making bill payments influences your FICO credit score more than any other factor. So if you have a history of making all of your payments on time, this would increase your score. But if you have a habit of missing payments, or if you’ve had debts sent to collection agencies in the past, this would hurt your score.

The amounts you owe are the second strongest factor. This refers to the amount of your available credit limit that you are using. Using a high percentage of your credit limit (i.e., being nearly “maxed out”) will hurt your overall score, because it suggests that you rely too heavily on credit. Using a lower percentage of your available limit will help your score, because it shows you know how to use credit responsibly.

There are other factors that influence your score, but you can see by the scoring chart above that payment history and amounts owed account for most of your score. So the best thing you can do to maintain a good credit score is pay your bills on time and keep your credit card balances low.

8. What can I do to increase my credit score?

Without a doubt, this is one of the two most common credit questions we get from readers. The reasons why are obvious. We’ve already talked the importance of a good score, in terms of qualifying for a mortgage loan. So when people find out that their scores are low, the first thing they want to know is how to fix it. The scoring chart above shows the five factors that influence your credit score the most. Here’s how you can use those factors to raise your score as quickly as possible.

Questions About Credit Reports and Scores?

If you have credit questions relating to your reports and scores (or how they apply to mortgage qualification), email it to Brandon. We will add your question to this list, along with our response.