Credit Report Review – Understanding Credit Basics

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Understand your credit report.

Why is it that some of the most important financial topics make our eyes glaze over?

If there’s one seemingly dry financial subject I can stomach that others simply cannot, however, its credit reporting—mostly because understanding the topic (FICO scores in particular) is crucial to the entirety of your financial life.

If you have great credit or are think your next stop is to find reputable credit counseling in Madison, it’s a good idea to know the basics of credit reporting. Let’s run through the how, what and why’s of a credit report and FICO score. Trust me; it won’t be half as bad as you think.

What Is a FICO Score?

The Fico score is the most referenced credit score there is, named after Fair Isaac Corporation, the score’s developer. FICO scores are used by lenders to determine the likelihood that you will pay back your debt on time; the better your score, the lower your interest rate on a loan will be.

FICO scores work on a scale of 300 to 850. If you have a score between 650 and 830, you’re considered to have good credit; any score under that range is considered less favorable. Those numbers, of course, don’t just come out of thin air. A FICO score is calculated based on the following criteria.

  • 35% of your score is based on your payment history; the longer your history; the better.
  • 30% of your score is based on how many outstanding balances you currently have; the fewer, the better.
  • 15% of your score is based on length of credit history; or how long you’ve possessed each credit account.
  • 10% of your score is based on new credit; or, how often you apply for new credit accounts.
  • 10% of your score is based on the types of credit you have in use. You want a good mix of revolving, installment and mortgage accounts.

Of course, these criteria are affected by a number of factors. Here are some tips as to how to make sure your FICO score is the best that it possibly can be.

  • Stay on track with your payments! Be both consistent and punctual with repayment.
  • Keep your credit card balances low. Monitoring your usage is key.
  • Pay off your credit cards with smaller balances and limit yourself to one or two to avoid having too many revolving cards.
  • Do not, however, close old accounts! Established debt—that has been paid on time—can only help your FICO score.
  • Don’t let any accounts go to collection agencies. Work out a payment arrangement with your original creditor or work with a reputable credit counseling agency like Green Path—even if you’re completely strapped for cash.
  • Avoid excessive inquiries if you have short credit history of few accounts. An inquiry is made each time you apply for a new credit account.

Okay—I Understand What a FICO Score is. But Why Is It Important?

Whether you’re using a credit card to pay for groceries or need a loan to get you through school, the modern world is fueled by credit. That being said, having good credit is necessary; if you have bad credit, it’s going to become much more difficult for you to get a mortgage, a low interest credit card or a car loan; heck, your credit score can even determine how much you pay for insurance. And just as credit information has become a more prevalent way of seeing if a person is both responsible and reliable, for many lenders, bad credit has come to represent irresponsibility.

Here are a few ways that demonstrate how your FICO score can drop to a less-than-desirable number.

  • A 30-day late payment can reduce your FICO score by an average of 80 points.
  • Being over your limit on a credit card can reduce your FICO score by an average of 30 points.
  • A foreclosure can reduce your FICO score by 110 points or more.
  • Filing for bankruptcy can reduce your FICO score by 150 points or more.

How Do I Get a Credit Report Review?

Thanks to the Fair Credit Reporting Act, you are entitled to receive a free copy of your credit file from each of the three credit reporting agencies every 12 months. You can order all three reports at once if you go to annualcreditreport.com, or you can contact each reporting agency individually throughout the year at their respective websites. Although these free reports will not show your FICO score they are still valuable to check for accurate reporting. Lenders are typically able to share your FICO score after you have applied for credit.

Be careful, though: ONLY annualcreditreport.com is authorized to provide free annual reports. While other websites may claim to offer free credit reports, what they’re really going to do is charge you for a subscription service after a free trial period, during which they’ll promise your annual report. These websites are likely either trying to sell you other services, or simply retaining your private information for their own deceitful purposes. Don’t be fooled.

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Of course, at Dane County Credit Union we’re here to help! We offer a one-on-one credit report review, wherein we can help correct inaccuracies, refinance credit accounts to save you money or simply offer more advice on how to improve your FICO score. So when the time comes to borrow money for a car or mortgage, you’ll spend less money on your family’s next steps

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Published by

Tom S.

Tom is a 2006 graduate of UW Madison, currently residing in Verona with his wife and 2 girls. He has been passionate about writing ever since he was 15 years old, and displays that same enthusiasm in his work today. When he’s not sharing insightful financial wisdom, you can find Tom chilling on the Union Terrace, enjoying craft beer at the Great Dane, or hiking at Governor Nelson State Park. In the Fall he loves to take his family to Badger Football games!