Credit 101

Understanding Credit Reports and Scores

What is a Credit Report?

• A credit report is a summary of your credit history, maintained by the three major credit bureaus: Experian, TransUnion, and Equifax. It includes information about your loans, credit cards, payment history, and public records such as bankruptcies.

What is a Credit Score?

• A credit score is a three-digit number (typically ranging from 300 to 850) that reflects your creditworthiness. It’s used by lenders to assess the risk of lending you money.

What Factors Affect Your Credit Score?

1. Payment History (35%): Paying bills on time has the biggest impact.

2. Credit Utilization (30%): How much credit you’re using compared to your total limits.

3. Length of Credit History (15%): The age of your oldest and newest accounts.

4. Credit Mix (10%): Having a mix of credit types (e.g., credit cards, mortgages, auto loans).

5. New Credit (10%): How often you apply for new credit accounts.

Common Credit Myths

Myth #1: Closing old accounts will improve your score.

• Closing old accounts can reduce your available credit and shorten your credit history, potentially lowering your score.

Myth #2: Checking your credit hurts your score.

• A "soft inquiry" (when you check your credit) doesn’t affect your score. Only "hard inquiries" from lenders do.

Myth #3: Paying off debt immediately boosts your score.

• While paying off debt helps, it can take time for the positive impact to show up on your credit report.

How to Read Your Credit Report

Sections of a Credit Report:

1. Personal Information: Name, address, Social Security Number, and employment history.

2. Credit Accounts: Details about your loans, credit cards, and payment history.

3. Public Records: Information on bankruptcies, liens, or judgments.

4. Credit Inquiries: A record of who has checked your credit.

Tips for Reviewing Your Credit Report:

• Check for errors in your personal information.

• Look for accounts you don’t recognize (potential fraud).

• Verify that payments and balances are accurate.

• Dispute inaccuracies immediately with the credit bureau.

Building and Maintaining Good Credit

Tips for Improving Your Credit:

1. Pay Bills on Time: Set up reminders or automate payments to avoid late fees.

2. Lower Credit Utilization: Keep balances below 30% of your credit limits.

3. Don’t Close Old Accounts: Maintain long-standing accounts for a better credit history.

4. Diversify Your Credit Mix: If possible, have a mix of installment loans and revolving credit.

5. Limit Hard Inquiries: Avoid applying for too much credit in a short period.

How to Maintain Good Credit:

• Monitor your credit regularly for changes or inaccuracies.

• Keep debt manageable—avoid maxing out your credit cards.

• Avoid co-signing loans unless you’re fully confident in the borrower.

Dealing with Credit Challenges

Missed Payments

• Catch up on past-due accounts as soon as possible. Contact creditors to negotiate payment plans if needed.

High Balances

• Focus on paying down the highest-interest debts first while making minimum payments on others.

Debt Collections

• Verify the debt is yours before paying. If it’s legitimate, negotiate a settlement or payment plan.

Bankruptcy

• Though damaging to your credit, it’s not the end. Begin rebuilding credit by obtaining a secured credit card and paying bills on time.

Credit Monitoring and Identity Theft Protection

Why Credit Monitoring is Important:

• Credit monitoring helps you track changes to your credit report, catch errors early, and detect signs of identity theft.

Steps to Protect Against Identity Theft:

• Use strong passwords for online accounts.

• Shred documents containing personal information before discarding.

• Avoid sharing sensitive information via email or phone unless you’re certain of the recipient.

• Monitor your accounts regularly for unauthorized transactions.

Smart Credit Habits

Budgeting Tips to Avoid Credit Trouble:

• Use the 50/30/20 rule: Allocate 50% of income to needs, 30% to wants, and 20% to savings and debt repayment.

• Create an emergency fund to avoid relying on credit during unexpected expenses.

Using Credit Wisely:

• Only charge what you can pay off in full each month to avoid interest.

• Avoid opening unnecessary credit accounts just for promotional offers.