By Lori Mann, AFC^®, FFC^®
Summit County VSC Financial Consultant

Despite what some people might think, “credit” is not a dirty word. In fact, in today’s world it is almost impossible to conduct any financial transactions without credit. Understanding what credit actually means to your personal finances is critical. While having credit does not mean you must incur debt or pay interest, it does mean you have the responsibility and opportunity to build a good financial reputation.

According to financial monitoring service Experian, credit is the ability to borrow money or access goods or services with the understanding that you’ll pay later. To the extent that creditors consider you worthy of their trust, you are said to be creditworthy,
or to have “good credit.”

The Consumer Financial Protection Bureau (CFPB) explains that a credit report is the statement containing information compiled by credit reporting agencies about your credit activity and current credit situation, such as your loan-paying history and the status of your credit accounts.

The most familiar credit reporting agencies are Experian, Equifax and Transunion. Creditors are not required to report every credit you have to a credit reporting company so each report might be slightly different.

Information contained in your credit reports (most people have more than one) include: (1) Personal Information, including your name(s), current/previous addresses/telephone number(s)/DOB and SSN; (2) Credit Accounts, including past credit accounts, creditor name(s), open and closed dates, credit limit/balances and payment history; (3) Collections; (4) Public Records, including foreclosures, bankruptcies, liens, civil suits and judgments; and (5) Inquiries. Many might not understand the differences between types of inquiries. A “soft inquiry,” generated when a creditor preapproves you for an offer or you have authorized a credit check, such as a potential employer authorization, does NOT affect your credit score. A “hard inquiry” happens when you apply for credit or a loan. This inquiry DOES drop your credit score for a short period. There is only one source from which you can safely get a free credit report: www.annualcreditreport.com/index.action. This red, white and blue site is authorized by Federal law.

Credit Report vs. Credit Score

Your credit report is a document of your practices in paying debt. Your credit score is a three-digit number, determined using a credit report, that calculates the likelihood you will succeed or fail in repaying a debt.

Five ratios are used to determine a credit score:

1. Payment History (35%) – How timely are you in paying creditors;
2. Utilization (30%) – How much credit you are using; for example, if you have a credit card with a credit limit of $1,000 and your balance is $900, you are using 90% of available credit. Using more than 30% of available credit will negatively affect your credit score;
3. Credit History Length (15%) – This includes the age of your oldest credit account, age of your newest credit account, and the average. If you close your oldest credit, this will drop your credit score for a short period of time;
4. Credit Types (10%) – Having diverse credit – mortgage, car, credit card, etc. – will assist your credit score; and
5. New Credit (10%) – Accounts you recently opened. Too many inquiries for credit can increase your credit risk and negatively impact your credit score.

While there are several credit reporting agencies, the top three are Equifax, Transunion and Experian. Lenders also use Fair Isaac Corporation (FICO). Credit agencies collect data about borrowing habits, which feeds a credit report. FICO calculates creditworthiness based on proprietary algorithms, scoring statistically from 300 to 850.

You can get your credit score from four different sources: (1) Check your credit card or other loan statement; (2) use a credit score service; (3) talk to a non-profit counselor; and (4) buy a score. See CFPB at www.consumerfinance.gov/ask-cfpb/where-can-i-get-my-credit-score-en-316/.

Credit reports are also a GREAT tool for spotting identify theft as well as information that is inaccurate, all of which impacts your credit score(s).

Do your due diligence in reviewing your credit reports and ALL the information contained in your credit report! A good financial reputation can and will save you money. I often say that a home and/or car will not define you, but a three-digit credit score will!