Take A Class In Credit Score 101

It’s so easy to get your credit score it would be surprising if you didn’t know yours. Several of the credit card companies now include credit scores in their monthly statements. If you don’t have one of these cards you could get your score on sites such as CreditKarma or CreditSesame or from one of the three credit-reporting bureaus – Experian, TransUnion or Equifax.

The problem is that despite this, there are credit myths that just won’t die. For example, a recent Bankrate Money Pulse survey found that an amazing 51% of Americans believe — wrongly — that if they have accounts with high balances but make their payments on time this will help their credit scores. And 37% if those surveyed believe that if you want to improve your credit you need to carry a balance on a credit card. This, too, is a myth as all you just need to have a credit card to build a credit history.

Understanding the basics

It’s becoming more and more common for Americans to check their credit scores. Another survey done by Bankrate in May last year found that 46% of the respondents said they had checked their scores at least once in the past year. An additional 14% reported that they had checked their scores in the past three years.

The Bankrate survey also found that most consumers do understand the basics of credit. A huge majority (81%) knew that having an unpaid account in collection hurts their credit scores. Sixty-three percent understood that if an account was 30-days late but paid in full later that this would should up as a negative on their credit reports. And 54% recognized the fact that if they have a short credit history this will hurt their credit scores.

The old and the young

The people most likely to be confused by their credit and credit reports are the old and the young. As an example of this, just 37% of those ages 65 and older and 47% of those aged 18 to 29 realize that having a short credit history could damage their credit scores. In comparison, about 60% of people age 30 to 49 and 50 to 64 knew correctly that the lack of a credit history could work against them free.

Not a deep understanding

While more and more Americans are looking at their credit scores, they don’t have the financial education necessary to understand what they’re seeing. The problem according to Bankrate is that credit scores weren’t created for us. They were created for the lenders to help them gauge an applicants’ ability to repay loans. As a result, they can be counterintuitive or not make sense to a consumer who is just trying to do a better job of managing her or his finances.

What’s often misunderstood about a credit score

Because most consumers don’t have a deep understanding of credit scores they can do things like close an old credit card they’re no longer using. This might seem like a good idea except it can damage the person’s credit utilization rate. This ratio, which makes up 30% of your credit score is calculated by dividing the total amount of credit you have available to the amount you’ve used. For example, if you have a total of $10,000 in credit available but have used up $3000 of it, you would have a credit utilization ratio of 30%, which would be good. However, if you closed that old credit card that had a $2000 limit, your credit utilization ratio would immediately go to 37.5%, which is a bit high.

Clean up your credit reports

Ken Chaplin, senior vice president of the credit-reporting bureau TransUnion, says it’s more important to clean up your credit reports than focusing on just your credit score. He advises you to pull your credit reports at least once every three months to make sure you haven’t been the victim of identity theft or that they don’t include errors. A report issued by the Federal Trade Commission (FTC) in 2013 revealed that about 20% of us have errors in our credit reports so severe they’re damaging our credit. So it would not be unusual if one of your reports did contain a serious error.

You can also get a better idea of why your credit score is what it is by looking for “risk factors” that could be damaging it and learn from them. There are many different credit-scoring models but there are some risk factors that are consistent from one system to another. These include high balances, numerous credit inquiries, and recent account delinquencies or where you were late in making your payments.

If you don’t understand something

Credit reports are like credit scores in that they weren’t developed for us. They can be difficult to read and contain things that are difficult to understand. If you find items you don’t recognize or understand don’t be afraid to go to your bank or credit union and talk with a loan officer. There is also credit-counseling agencies that could be helpful. And if you do find errors that could be damaging your credit score it’s critical to dispute them. All three of the credit bureaus have forms on their websites for this purpose but it’s much better to write a letter disputing the item(s) along with whatever documentation you have in support of your claim. When the credit bureau receives your letter and documentation it must forward everything to the institution that provided the information you’re challenging. The institution then has 30 days to verify the item. If it doesn’t respond within 30 days or can’t verify the item then it must be removed from all your credit reports.

It’s not easy

The task of wading through all three of your credit reports and working to decipher some of the arcane terminologies won’t be an easy one. But if you do it you will become much smarter about your credit and may even end up with a higher credit score.