Estimated read time: 4-5 minutes
SALT LAKE CITY — We have all seen ads for free credit reports on TV. Typically they go like this: poor guy does not know that his credit score or his spouse's score is bad and thus cannot get a cell phone, a good job, or a loan to buy a nice car or new house, all told through a catchy jingle.
While these ads are clever and amusing, your credit score is no laughing matter. They do a great job at raising awareness for a very important issue, but to take it a step further, here is a breakdown of what you really need to know.
Why does it matter?
Your credit score is a reflection of how creditworthy you are, meaning that banks and other lenders will use this three digit number to assess the likeliness you will pay off a loan and decide how much interest you should be charged on a loan. Having a good score means you will be in a better position to get a loan for a car, home, or business and you will receive a better interest rate, saving you money. Your score can also be reviewed by insurance companies and landlords.
What is in a credit report?
A credit report is a record of your most important financial documents. Credit bureaus, or credit reporting agencies, collect data about your purchasing and payment history. This information is gathered from lenders (banks, credit unions), merchants (utilities, mobile providers), and even past landlords. These records are then compiled into a report including personal information (social security number, address, date of birth, phone number, and employment history), your credit history, public records, past report inquiries, and statements made to dispute your report.
How do you obtain your credit report and score?
There are a lot of ways to get your credit report and score. Thanks to the Fair and Accurate Credit Transactions Act (or FACT Act) of 2003, you are entitled to request one free credit report per year from each of the three main credit-reporting agencies: Experian, Equifax, and TransUnion. Consider staggering your requests throughout the year. For example, order a free report from Experian in January, order a free report from Equifax in May and then order a free report from TransUnion in September. Next year, start over with a free report from Experian. You can also order a report via AnnualCreditReport.com, which is the ONLY authorized source for the free annual credit report that is yours by law.
For additional information on how to get your free credit report, why you need it, what to look for on your report and how to address credit errors, visit the Federal Trade Commission's website or speak with your financial advisor.
What is a good score?
Your credit score is a ranking based on how much credit you have established over time, how often you pay bills on time, and whether or not you have steered clear of bad credit card debt. This ranking is calculated differently depending on the credit bureau or reporting agency. Without getting too technical, a score above 700 is considered good and in most cases will qualify you for competitive interest rates and terms. The higher your score, the better those rates will be, with anything over 800 getting the best deals.
What is the best way to improve your score?
The best way to improve your credit score is to have multiple lines of credit, such as revolving (credit cards) and installment (personal loans like car loans, student loans, mortgages, etc.). But that's not enough—you need to pay ALL of them on time—no ifs, ands, or buts. You also want to seek loans and credit cards that report to all three main credit-reporting agencies. The best interest rates loans and credit cards typically come from community banks and credit unions, but it is important to do your research and make sure you are applying for the right credit cards and loans to meet your needs. And while we are talking about credit cards, if you have high balances, focus on paying them down. It is a good rule of thumb to keep your balance low, as in below 30 or even 10 percent, or not carry a balance at all.
Sharon Cook is the senior vice president of Marketing and Public Relations for Mountain America Credit Union