This is the third article of the A-B-C's of credit and debt. Today is C for Credit.
Have you heard one of those FreeCreditReport.com TV commercials? You know, the ones with that catchy tune played by those guys in costumes? Heck, nearly every night while watching TV we hear that song. In fact, the other night my daughter started singing along, and it will be at least 4 years before she even thinks about getting a credit card (longer if I can help it!)
So I guess the average consumer probably falls for that catchy tune. Giving away something for "free" is always good for business and it probably works like a charm in this case. Here's an article on how the "free credit report" ads really work.
But what most people don't realize is that free doesn't always mean free, especially when it comes to your report.
In the last few months I've seen a huge increase in the number of articles on credit scores - not credit reports, but the score that goes along with it. The problem is that people are now starting to focus on their credit scores. Not that being an educated consumer is a bad thing. But focusing on your credit score is like focusing on the scale when trying to lose weight - it's nice to see your weight going down, but the scale only shows you what your weight is. It doesn't help you lose it!
If all you do is just keep looking at the scale, your weight won't change (in fact, if that's all you do it might actually go up!)
Same with credit scores - it shows you where you stand, but if all you focus on is your score, it won't help your credit get better!
At least with a scale you know what the number means. If you gain weight the number goes up, if you lose weight it goes down. But when it comes to credit scores, most people don't know the difference between 500 and 600 and 700 and 800. So focusing on your score is pretty much a waste of time. Wondering where to get a copy of your credit score? Here's a good article that explains how & where to get free credit scores.
So, why are people focusing more on credit scores instead of their credit report?
Because Americans like numbers. And they like funny, creative TV ads. They want their news fast. They want their food fast. They want losing weight to be easy. And they want fixing their credit to be easy. Looking at a number is easy, anyone can do that.
But looking at the number won't help your credit. Especially if you don't know what the number means!
So, here's a quick rundown on the difference between a credit report and a credit score - and what it means to you:
Your credit score (sometimes called a FICO score) is determined by the credit bureaus, based on your credit history and financial data. The higher the credit score the better. For most people scores typically range from 600-800. There is no way to directly change your score. However, you can change your money habits that affect your score - the biggest one is to pay your bills on time. Here are some others:
- Reduce the amount of your debt you have
- Stay within your credit limits & pay on time
- Don't use all your available credit
- The longer you've had credit the better
- Don't keep getting more credit cards and taking out more loans
The hard part about understanding credit scores is that each of the 3 credit bureaus calculates its own score, so you really have 3 credit scores! There will all be pretty close, but not the same. Because your creditors don't always report your information to all 3 bureaus.
That's why you need to get a copy of all 3 credit reports (see below) so you have an accurate understanding of what you need to improve.
Your credit report shows your entire credit history, and lists all of the above factors that influence your credit score. There is one official website that allows you to get a free copy of your credit report from each of the 3 credit bureaus once a year. So you can get all 3 at once, or get one every 3-4 months. So rather than paying for the "free" monitoring service that's required when you sign up for one of the credit reports from the ads, you can monitor it yourself by spreading out your requests throughout the year.
The "experts" will tell you that you can't repair your credit and you must wait 7 years for bad credit to fall off. But that's not entirely true. I had great success fixing my credit problems - it's not that hard once you know how to do it correctly.
You can pay to have this done, but if you take the time to learn how to do it you can certainly fix your own credit.
Not all that complicated, right? But can be confusing if you fall for the fancy TV ads. And focus on your credit score instead of your money habits. There's nothing wrong with getting your credit score so you know where you stand. But you can get a good idea by looking at your credit report. The more "bad stuff" the lower your score will be.
If you really want to improve your financial situation, and increase your chances of being approved for credit (and lower interest rates!!!) get a copy of your credit report, fix the bad stuff, and your credit score will go up even while you are not looking at it!
Thanks to the carnival of personal finance for including us in the "Ask the right questions" edition.