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Credit FAQ: Answers to the Internet’s Top Credit Questions

Debt.com » Credit FAQ: Answers to the Internet’s Top Credit Questions

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Good credit is essential for financial stability and success. But like so many topics in personal finance, it’s usually not something you learn about in school. With that in mind, Debt.com created this FAQ to answer all of the common – and less common – credit questions you have. These easy answers can help you understand your credit better so you can maximize your score and maintain a clean profile.

Are credit scores and reports the same thing?

Credit scores and credit reports are closely related, and credit reporting agencies will bundle them together – to make more money off you. Here’s an example…
Equifax offers a $40 package that provides a “3-Bureau Credit Report with scores that reflects your entire credit profile in a simple, consolidated view.” But you can get most of this information for free.

The reality: Credit reports and credit scores are mostly the same thing in a different format – like water and ice. Reports are most useful for consumers, and scores are most useful for lenders. The big differences between a credit report and a credit score are cost and transparency…

credit report documents your credit history, including credit accounts with your borrowing limit or loan amount, the account balance, and whether you make payments on time. It also includes requests for credit and information on accounts in collection, bankruptcies, and foreclosures. You can get these free every year, and you can review and report any errors you find.

credit score is a numerical summary of all the information in the report, and it’s derived using a semi-secret formula that varies over time and between credit bureaus. You can get a ballpark estimate of your score by knowing what’s in your report. You usually pay for a peek at your scores, with a few exceptions. In 2013, First National Bank of Omaha and Barclaycard U.S. became the first to offer customers truly free credit scores, according to CNN Money. And now, anyone can check out their FICO credit score for free using Discover Credit Scorecard, regardless if you’re a Discover member.

Can I have a credit score without a credit card?

Of course. As long as you have some credit history, then you have a credit report. If you have a report, then you have something to calculate a score from. Some people stay away from credit cards all their lives and they still achieve a good score. It just involves using loans and repaying them responsibly.

It is worth noting that credit is usually easier to build with responsible credit card use. Credit cards diversify your debt and show that you can manage revolving debt. That makes you more experienced with credit and thus makes you more creditworthy.

Do student loans affect credit scores?

Student loans have a substantial influence on your credit score. How you manage and repay your student loans directly affects your credit history and, in turn, your credit score. Timely payments and responsible handling of student loans can contribute positively to your credit score, demonstrating good financial behavior. Conversely, missed payments or defaulting on loans can significantly harm your credit score, making it more challenging to secure future credit or loans. It is crucial to prioritize student loan payments and manage them responsibly to maintain a healthy credit profile.

Find out how student loans affect your credit score »

Do tax liens affect my credit score?

Recent changes to how credit scores are calculated affect how tax liens show up on your credit report. In April 2018, tax liens were removed from credit reports altogether. This means that the liens won’t change your credit score. You will still need to pay off your tax debt, though, as mortgage lenders still look at tax liens.

Find out what tax liens will do to your credit score »

Do credit scores discriminate?

FICO is quick to rattle off several things it doesn’t include in credit scores: race, color, religion, national origin, sex, and marital status. (Because that’s the law.) It also mentions a 2010 Federal Reserve study that concluded credit scores don’t treat people differently based on race, ethnicity, or gender.

The reality: The bigger picture is more muddled, as Lisa Rice and Deidre Swesnik from the anti-discrimination group National Fair Housing Alliance have argued in the Suffolk Law Review.[8] They say that there’s a historical double standard in the market that unfairly affects the credit of minorities even if they’re judged by the same criteria — they get the same treatment but different results.

Why? The scoring model itself might not be discriminatory, but when somebody else discriminates, it can taint the data. The authors cite a 2011 Justice Department settlement with mortgage lender Countrywide, which allegedly charged more than 200,000 black and Hispanic borrowers higher fees and interest rates than it did white people.[9]


“Thousands of families who should have received prime loans were steered to subprime loans,” the authors say. “It is reasonable to assume that their credit scores were negatively impacted by the mere fact that they received a more expensive subprime loan.” (Lest you think that was an isolated incident, check out the many more recent instances of widespread discrimination in this list from the Justice Department.)[10]

Some U.S. senators make a similar argument about using credit reports for hiring. They argue it disproportionately disqualifies women and minorities, and they’re proposing legislation to stop the practice. Dozens of civil rights groups, from the NAACP to the National Organization for Women, back it.

Do credit scores work the same for everybody?

When people explain how credit scores work, they usually give this breakdown from FICO…

Payment history: 35 percent

Amounts owed: 30 percent

Length of credit history: 15 percent

Types of credit in use: 10 percent

New credit: 10 percent

What they tend to leave out is where FICO says this: “These percentages are based on the importance of the five categories for the general population.”

The reality: As FICO tells it, the importance of any particular factor depends on your overall credit profile. People who haven’t been using credit for long don’t have much of a payment history (whether you paid on time) or a credit history (how old your accounts are). All their credit is new credit — so the percentages above are different for them.

“As the information in your credit report changes, so does the importance of any factor in determining your FICO Score,” the company says.

How different? And how much of that is misdirection to keep people from figuring out the exact formula? There’s no telling since FICO doesn’t offer a similar pie chart for any other group of people. They want you to learn the principles of good credit, not how to game their system.
The closest the company gets to revealing how credit mistakes affect people differently is just one chart, which gives a credit background for two people, their initial scores, and what happens to their scores after they max out a credit card, make a late payment, or go bankrupt.

Do employers do credit checks?

No, an employer credit check does not directly impact your credit score. When an employer requests a credit check, it is considered a “soft inquiry” or “soft pull,” which does not have a negative impact on your credit score.

It’s important to note that even though an employer credit check does not directly affect your credit score, negative information found in your credit report, such as late payments, collections, or bankruptcies, can still be a factor in the employer’s hiring decision.

Find out what employers look for in a background and credit check »

Do you have to go into debt and stay in debt to get good credit?

One theory that floats around is that the only way to have a good credit score is to go into debt, stay in debt, and continually pay your accounts perfectly — without adding too much debt or paying too much off. In other words, stay in debt for as long as you can.

The reality: The only inkling of truth in this myth is that you have to play to win. It’s also true if you play without knowing the rules, you’re going to lose. But in general, good credit scores belong to people with less debt.

Take what FICO calls a credit utilization rate. That’s the percentage of available credit you’ve tapped — so if you have a credit card limit of $5,000 on one or across multiple cards, and your statement(s) show a balance of $1,500, your rate is 30 percent. Having a rate below that is good for your credit score, since it shows you are in control of your finances and not a desperate gambling addict.

In the same vein, not paying off your debt, not paying on time, and having too many credit cards can hurt your score.

Sure, you can argue using credit cards at all will mean you’re going into debt even if you pay off the balance in full every month. You could also argue that you’re continually in debt to the phone and utility companies because you pay those bills on a monthly basis. But that’s dumb.

You don’t have to go into debt to get good credit. If you’re responsible, you can build credit and make money doing it.

Do you need monitoring if you don’t have credit cards?

It’s important to recognize that any type of credit can be included in your profile. This includes credit cards, as well as loans, in-store credit accounts and even public debts, such as back child support or alimony. If you opened any of these types of credit, even if the account is closed, you should have a report. Therefore, you have reason to check and monitor your credit. The type of ongoing monitoring you need depends on your goals.

What level of monitoring do you need? »

Does an authorized user build credit history?

The short answer is yes. A friend or family member can add you as an authorized user on their credit card account and you will receive a card of your own connected to theirs. This is a great option if you don’t have much of a credit history because you can start using credit without having to go through an approval process. Remember, an authorized user is not the same thing as a cosigner or a joint account holder.

Determine how being an authorized user benefits you »

Does checking your credit score lower it?

No. Checking your credit score will never lower your credit. Only inquiries known as “hard pulls” can affect your credit score. A hard pull happens when you authorize a check related to a credit application. In other words, when you apply for a new loan or credit card. If you have too many new credit applications within a 6-month period, it can decrease your score.

All other inquiries are considered “soft pulls” and don’t negatively affect your credit score. This includes not only you checking your credit yourself, but also things like employment credit checks.
You can check your credit score daily and even check your credit reports daily through a monitoring service and it will never negatively affect your score.

Does closing a credit card hurt your credit?

Yes. Don’t be too quick to close that older credit card. Having a long-time credit card account on your credit report works in your favor in a few ways that you may not realize.

Learn more about what happens when you close a credit card account »

Does getting denied for a credit card hurt your credit score?

Being denied a credit card or loan does not in itself hurt your credit score. But, you will notice a drop in your score.
Find out why and what you can do to make sure you are not denied again. »

How does leasing a car affect your credit score?

Leasing a car can help you raise your credit score, but only if you are on time with your payments. When you first start the lease, you may actually see a slight drop in your score. This is because starting a lease opens a new account on your report. After about a month, this slight drop should bounce back up. If you pay your lease off early, this could also hurt your credit score. Stick to the terms of the lease and make your payments on time to really improve your credit.

Learn more about how leasing a car changes your credit score »

How is my score calculated?

Most credit scoring models use five basic factors to calculate consumer credit scores. Each factor carries a different “weight” for how much it impacts your score.

Credit history: 35%

Utilization: 30%

Length of use: 15%

New applications: 15%

Types of credit in use: 10%

How long does credit repair take?

The timeline for correction depends on the number of mistakes you need to dispute. Credit bureaus have 30 days from the date they received your dispute to verify the information. In some cases, they may request follow up information which means the process may take longer, depending on how quickly you respond.
 
Understand the repair timelines »

How much does credit repair cost?

There are different levels of credit repair services. You can actually complete the process yourself at minimal cost. There is software available for purchase that can assist you. Finally, you can hire a third party licensed attorney in your state to make disputes on your behalf.

Evaluate service versus cost »

Is carrying a balance good for credit?

When you carry a balance on your credit card, you’ll accrue interest charges based on the annual percentage rate (APR) of the card. These charges can add up quickly and can make it more difficult to pay off your balance in the future. Additionally, carrying a balance on your credit card can negatively impact your credit score, as it can increase your credit utilization ratio and make you appear less creditworthy to lenders.

Learn more about carrying a balance on a credit card »

Is credit repair legal in all 50 states?

Federal law requires that any consumer has the right to dispute mistakes that may appear in their credit report. That means credit repair, itself, is 100% legal no matter where you live. You are also allowed to retain a third party to represent you and make disputes on your behalf. That party must be an attorney licensed in your state. Credit repair is illegal if the company you hire to correct your credit does not have a linseed attorney. They would not have the authority to make disputes for you.
States also have laws that build on the federal protections granted to you.
Learn more about repair regulations »

Is FICO a government agency?

The acronym FICO sure sounds like it stands for something like Federal Institute of Credit Opportunity, and you can’t be blamed for thinking something as essential as credit would be run by the government. But it’s not.
The reality: FICO was previously known as the Fair Isaac Corporation, after founders Bill Fair and Earl Isaac. TransUnion, Experian, and Equifax are also private companies. The federal Consumer Financial Protection Bureau can regulate the industry, and there are already laws like the Fair Credit Reporting Act that set out rules for credit reports and prevent discrimination. But there’s nothing saying they have to explain exactly how credit scoring works, and they don’t.

Is there any way to raise your credit score in a month?

There are a couple of different methods you can use to raise your credit score quickly. The two actions that have the most impact are paying off a large credit card balance and getting current on a balance that’s past due. It’s unlikely that you will be able to raise your score by 50-100 points in one month, but you could boost your score enough to make a difference to creditors.

Learn more about quickly improving your credit score »

Is there such a thing as free credit repair?

If you chose to go through the credit repair process yourself, it’s relatively free. You may incur small charges if you use registered mail, return receipt to send your disputes to the bureaus. However, you can obtain and review your reports entirely for free through annualcreditreport.com. In most cases though, if someone or some piece of software assists you with the process, there will be a cost.

Weigh cost versus effort of free credit repair »

Should I monitor with one bureau or all three?

Although your credit reports should contain the same information, they may have discrepancies. These may be caused by differences in reporting or mistakes that should be removed. That gives you a reason to monitor the reports from all three credit bureaus. However, recognize that 3-report monitoring is usually more expensive.

Weigh the benefits of 3-bureau monitoring »

What happens to your credit score if you land in prison?

Even though your prison sentence won’t show up on your credit report, missed payments definitely will. There are ways to check your credit score from jail and prevent identity theft. To avoid credit score damage, talk to your creditors about allowing a friend or family member to take charge of your accounts. Don’t close any accounts, as this can actually hurt your credit score, but be mindful that some companies will cancel cards without warning after a period of inactivity.

Find out how your credit score is affected by incarceration »

What has the biggest impact on your credit score?

Many factors go into calculating your credit score. Your payment history has the most impact, so make sure you are paying your bills on time if you want a high score. Other factors, like the length of your credit history and your account utilization, also cause credit score fluctuations. To see why your credit score may be changing, it’s important to check your credit report. Luckily, any negative impacts will lessen over time as the derogatory item ages.

Learn more about the most important factors for your credit »

What is a credit report?

A credit report is a profile of your life as a credit user. It captures the loans and credit lines you’ve maintained throughout your life. By law, positive and neutral information can remain indefinitely, while negative information is removed after set periods of time.

The information contained in your report is what the credit bureaus and creditors use to calculate your credit score. Anytime you apply for a new loan or credit card, you authorize the company to run a credit check. This means they review your credit report to determine your risk as a borrower.

Learn more about your report »

What is a credit score?

A credit score is a 3-digit number that lenders use to evaluate your creditworthiness. It helps lenders and creditors assess your risk as a borrower. The FICO credit score is the most widely used. FICO scores range from 300 to 850. The higher your score, the easier it is to get approved for financing.

Learn more about FICO scoring »

What is credit monitoring?

Credit monitoring is a financial service that tracks changes in your credit. It allows you to build credit effectively and maintain a high score. The service also alerts you to changes in your credit report that may impact your score, either positively or negatively. Monitoring allows you to proactively build credit while avoiding actions that lead to a bad score.

Learn more about credit monitoring »

What is credit repair?

Credit repair (also called credit restoration or credit correction) is the process of disputing mistakes in your report. Between your creditors and the credit bureaus, errors can occur in reporting. This is the financial process of disputing those mistakes. If the information cannot be verified it must be removed.

Learn more about this process »

What will help my credit score the most?

If you’re new to credit or you need to rebuild your score, you are probably wondering what you can do that will help it the most. Late payments have the biggest impact on your score, so catching up on past payments will really help. In addition, paying off credit card debt will improve your credit score. To keep up with what’s going on with your finances make sure to check your credit report.

Discover the best way to help your credit score »

Why do I have more than one credit report?

Each credit bureau (Experian, Equifax, and TransUnion) maintains its own proprietary version of your credit report. This means you actually have three reports instead of just one. Your reports generally contain the same information, although the way it’s reported in each version is unique.

Learn more about your three reports  »

Why is there so many different credit scores?

John Ulzheimer, a credit expert who used to work for both FICO and Equifax, is known for saying there are tons of different FICO credit scores. Not one, not three, but more like 50 variations.[15] Some people take that to mean credit scores are all in the eye of the beholder, but he doesn’t say that.

The reality: There are indeed tons of credit scores, just like there are multiple versions of Windows and iPhones. The scoring model gets changed over time and can be altered to focus on different things for different kinds of credit, such as auto loans or mortgages. Then the credit bureaus all have their own variations of those different models.

That means the odds are poor the scores you purchase are the exact same scores lenders see. The odds are even worse if you’re not looking at a FICO score, which is the industry standard, but some other kind of free score estimate or alternative model. For instance, the credit bureaus have developed the VantageScore to challenge FICO, which is a totally different model.

But all those variations only matter when you’re on the threshold between an OK loan and a good one, and actually, plan to seek that loan in the next few months. The rest of the time, the exact number doesn’t matter — because the ways to boost it are the same. Like losing weight, you don’t want to fret over the number daily. Just keep doing the things you know will move the needle over time.

Will asking for credit hurt your credit?

Hard credit inquiries can hurt, but usually not much, and the damage is temporary.  Inquiries affect you for two years or fewer.

The reality: The more credit and credit history you have, the less inquiries matter. If you’re a credit newbie, it’s a bigger deal — but you have less to lose by asking, anyway.
“For many people, one additional credit inquiry may not affect their FICO score at all. For others, one additional inquiry would take less than 5 points off their FICO score. Inquiries can have a greater impact, however, if you have few accounts or a short credit history.” – FICO

You just don’t want to get carried away. The more inquiries lenders see, the more scared they are that you’re credit crazy and likely to go bankrupt. In their eyes, every additional inquiry is potential extra debt that hasn’t shown on your report yet.

The exceptions are home and auto loan inquiries. Because you’re expected to comparison shop on big purchases like these, FICO’s formula lumps together all the inquiries from a 30-day period.

Learn more about how new credit applications affect your credit score »


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