Lesson 6: Credit Reports & Credit Scores
Here’s a fun fact: the word “credit” comes from the Latin word meaning “trust” or “believe.” And how does a lender know they can trust you to pay them back? They look at two pieces of information: your credit report and your credit score.
Beginning with your credit report, there are three companies, called credit bureaus, that keep track of all of your credit information. Under law, they’re required to give you a free credit report once a year if you request it. It’s important to know what’s in your report, and if you find errors, there are ways to correct them.
The first section in your report contains personal information like addresses, employers, your social security number and your name. The next section is a summary of your financial accounts, and this is the meat of the report. The summary lists credit limit, balance, payment history, and even accounts you’ve closed. All of this information is held for seven years.
Another section is devoted to credit checks for things like loans and housing. There might be a last section for public records, and it’ll show things like bankruptcy, missed tax payments, or child support.
For your credit score, the three credit bureaus take your financial history and convert it into a three-digit number between 300 and 850. The score you get is basically how likely they think you are to default on your debt, so 300 would mean that they’re pretty sure that it’ll happen, while a score of 850 means you’re almost guaranteed to repay any money you borrow.
Any score above 700 is good, and this is where you need to be to get lower interest rates. If your credit score is bad, the more difficult it’ll be to get credit, and the more you’ll have to pay for it with higher interest.
Your credit score is not included with your credit report, but sometimes your credit card company will provide you one with your statement. Also, if you apply for credit, the lender must send you a copy of your report as well as your score when they check it. Another place to get a credit score is through services online, but these quotes aren’t always accurate, so beware.
Why are your credit history and credit score so important? Because any time you apply for credit, a job, an apartment, or insurance policy, somebody’s going to look at them. So go ahead and request one so you know what those people are seeing.