Getting and Keeping the Credit (Score) You Deserve

I recently discovered that two unfamiliar credit cards, both with high credit limits, were issued to me by the same bank while reviewing my credit report. The problem is that I never opened these credit cards. This certainly puzzled me and compelled me to take immediate action.  After all, as a Financial Advisor, I am constantly reminding my clients to pay attention to the details of their credit reports, so now it was my turn. The good news is that I filed a dispute with Experian online and they resolved it within 10 days.

My personal experience is a reminder of how important it is to review your credit report annually for any errors or dings that could negatively impact your credit score and harm your future financial well-being.  

Why all the fuss over a credit score?  Your FICO credit score is the most widely used score by lenders to measure your financial worthiness and access to credit.  Credit card companies, mortgage bankers, and auto dealerships are three common lenders that check your FICO credit score to decide whether you qualify for a loan and/or to determine the interest rate they will charge.  Insurance companies, landlords, and employers also check your credit for any signs of financial distress before issuing you an insurance policy, renting you an apartment, or offering you a job. Whether you are buying a new home with a 30-year mortgage, or a car with a five-year loan, having good credit could save you hundreds or thousands of dollars in interest over the life of the loan.

FICO credit scores range from 300 to 850, and unlike in golf, the higher the score, the better.  A score of 670 to 739 is considered good, 740 to 799 is very good and over 800 is excellent.  Five factors comprise your credit score:

1. Payment history - 35%: Making your payments on time is the most important factor in calculating your score. According to MyFICO.com, just one 30-day delinquency could cause a 100-point drop on a FICO score of 780. To the extent that you have a job loss or medical emergency that may prevent you from paying your bills on time, contact your lender immediately about reducing your minimum loan payment or working with you on a temporary solution.
2. Amounts owed - 30%: Next is how much you owe across all of your credit accounts and the percentage of available credit you’re using (i.e., credit utilization ratio).  Generally, a good credit utilization ratio is less than 30%, which means that your balances are less than 30% of your total available credit limits.  Maxing out credit lines may indicate overspending and problems making future payments.  
3. Length of Credit History - 15%: Lenders like to see that you have a long history of managing credit responsibly. The longer a credit card is open, the more it positively affects your credit score, even if you are not actively using it. This is why closing older credit cards tends to hurt your credit score in the short term.
4. Credit Mix - 10%: Lenders also like to see a combination of different types of credit and how many total accounts you have.  
5. New Credit - 10%: Each time you open a new credit account, a “hard inquiry” is triggered and the average length of your credit history is reduced, which lowers your score.

Your credit score is based on your credit report which contains personal information such as past addresses, co-applicants, employers and a detailed transcript of your credit history that includes when you opened and closed credit accounts and loans, balances, credit limits, and your payment history.  It also contains public record information such as bankruptcies and tax liens.  Most negative dings such as late payments and collection accounts will stay on your credit report for seven years.  Chapter 7 bankruptcies are there for ten years.  

Every 12 months, you are entitled to a free credit report from each of the three major credit bureaus – Equifax, Experian, and TransUnion - visit AnnualCreditReport.com or call 1-877-322-8228.  Although your credit report won’t actually have your credit score on it, rest assured that all of your credit report information is used to determine your credit score.  Current credit scores may be obtained from your credit card companies, lenders or a credit monitoring service, typically for a fee.

Once you have your credit report in hand, make sure to review it for accuracy, as mistakes can happen. This also is a good opportunity to check for identity theft. A 2013 Federal Trade Commission survey found that 20% of consumers had an error on at least one of their three credit reports. If you do find an error, start by disputing it with the specific credit reporting agency that made the error (just as I did with Experian) either online, by certified mail, or by phone, then follow up with the company that provided the information to the credit bureau.  Information found in the Consumer Financial Protection Bureau’s, How to Dispute an Error on My Credit Report, provides helpful details for all three national credit reporting companies. Credit bureaus must investigate any items in question within 30 days, unless they consider your dispute to be frivolous.  

Lastly, anyone placing a credit freeze to prevent new creditors from accessing their credit report will see “File Frozen Due to State or Federal Legislation” on their credit report.  Each credit bureau must put the freeze in place within one business day.  To place a fraud alert, consumers only need to contact one of the three credit bureaus, which will then notify the other two bureaus. Learn how to protect your credit with a credit freeze.

Bottom line, your credit can affect everything from everyday shopping to big ticket purchases; from where you live to getting a job or starting your own business. Maintaining good credit can have a dramatic impact on the quality of your life regardless of your level of wealth.