Mellody Hobson: Fiscally Fit in the New Year

By
ABC News
January 7, 2008, 3:49 PM ET
6 min read

Jan. 3, 2007 — -- When it comes to fiscal fitness, your credit score is the key piece of personal financial information that impacts whether or not you can get a loan, credit card, home or job.

Naturally, it makes sense to pay close attention to your score.

The national average credit score is 723, but individual scores can range from 300 to 850, with a higher number indicating a lower credit risk. A score in the 700s or higher is excellent. Around 650 is a midrange score, and anything lower than 600 falls in the "needs improvement" category.

As the calendar turns, it's wise to get a copy of your credit report to start the new year.

According to the Public Interest Research Group, one in four credit reports has errors that are serious enough to disqualify consumers from opening a bank account, purchasing a home or even getting a job! Resolving any mistakes and improving your credit score should be priority resolutions.

The easiest way to access a free credit report is to log on to www.annualcreditreport.com. Additionally, you can obtain a copy of your report by calling the toll-free numbers of the respective big three credit companies -- Equifax, Experian and TransUnion. They will provide your credit report free of charge, but you will have to pay a nominal fee should you want to know your actual credit score.

What Is on Your Credit Report?

Personal information, such as your name, current and previous addresses, employers, date of birth and social security number are listed on your credit report. There is another section detailing your credit history, which includes the dates you opened your accounts, credit limits, balances and your monthly payment history.

Positive information that makes you look responsible remains on your report indefinitely, but negative information, including closed accounts, is removed seven years after the last activity. Other information that stays indefinitely includes credit transactions of $150,000 or more, a job with a salary over $75,000, and an application for credit or life insurance valued at more than $150,000.

Public records also appear on the report for a period of time. For example, bankruptcies remain for 10 years, unpaid tax liens for up to 15 years and delinquent child support payments for up to seven years. Inquiries, which occur every time a party requests a copy of your credit report, also show up on the report.

Finally, a statement of dispute might be included if you challenge part of your credit report. It will remain until the problem is resolved (usually within 30 days).

How Is Your Credit Score Calculated?

Before credit scores existed, lenders had to determine whether to approve loans on a case-by-case basis, a time-consuming process filled with potential bias and room for error. During the 1980s, Fair, Isaac and Company created a standardized approach to calculating credit scores that removed bias and saved time. This approach produces FICO scores which are now used by over 70 percent of lenders.

Your credit score is based on factors such as your payment history; the number of late payments you have made; the type, number and age of accounts you have; your total amount of debt; recent credit inquiries; the length of your credit history; and public records. Since most of these factors are variable, your credit score will fluctuate over time.

In order for a score to be calculated, you must have at least one account that has been open for six months or more and at least one account that has been updated within the past six months.

What Does Your Credit Score Mean?

A credit score, also known as a FICO score or Beacon score, is calculated using a credit-scoring model that assesses various components of your credit history, including timeliness of your bill payments, your outstanding credit, the length of time your credit has been active, the types of credit you have and any acquisition of new credit.

How Can You Fix Mistakes?

There are several things you can to to address mistakes on your credit score:

1. Send your report to the credit reporting agency with a written explanation of the problem (be sure to keep copies of all your correspondence). The agency will investigate the discrepancy and might notify the company that is the source of the problem if further investigation is needed. As soon as the issue is resolved, the credit reporting agency will update your report and notify you of the changes.

2. Contact the creditor or lender immediately if you believe you are a victim of identity fraud. Most creditors have procedures for settling disputes, and the issue can be resolved quickly if there is accurate proof. Under the Fair Credit Reporting Act, the creditor is required to resolve the issue and update your records, usually within 30 days.

3. Contact the other major credit rating agencies (CRAs) to universally address the issue. If there is a discrepancy on a report from one agency, chances are this same error will also appear on your report with the other two major agencies.

4. Check to make sure the error is fixed within 30 days of your inquiry. The CRA should provide you with a copy of your report free of charge, and they can also send the updated report to anyone who has obtained the inaccurate version within the last six months (or two years in the case of employers).

5. If you are unable to resolve a discrepancy, file a statement (under 100 words) with the CRA at no extra cost, explaining the dispute. This statement will be included in your credit report for as long as the item in question remains on your report.

How can you improve your credit score?

If you are concerned about a low credit score, keep in mind that it will not change instantly since it is based on your borrowing and repayment behavior over time. However, there are some ways to boost your credit score:

  • Do not sign up for new, unnecessary credit cards. Although additional cards provide you with greater availability of credit, most likely they will not raise your score.
  • Make your payments on time as a history of late payments lowers your score.
  • If you have a legitimate reason for being late on your payments (such as an illness), contact the credit reporting agencies so they can add the explanation to your record.
  • Try to keep your account balances low because high outstanding debt can raise your score.
  • Correct inaccurate information on your report. It may be hurting your score.
  • Do not apply for several new credit cards at once. Many inquiries will appear on your report.
  • Work on paying off your debt rather than just moving it around. Owing the same amount but having fewer open accounts can lower your score if those accounts are maxed out.

    • Clarifying Some Common Myths

  • Do not cancel or close old cards you no longer use that indicate responsible credit. This can effectively shorten your credit history, and accounts with zero balances can help your score.
  • Opening new accounts is often seen as a quick fix to lowering your debt to credit ratio, but this can lead to numerous inquiries on your report and actually lower your score.
  • Contrary to popular thinking, shopping around for a loan will not negatively affect your score. The inquiries will be made for a specific type of credit during a short time period, and several inquiries about the same type of credit within 14 days will only count as one inquiry. however, keep in mind this only applies to loans, not credit card inquiries.
  • Your credit report is not merged with that of your spouse, so marrying someone with poor credit will not affect your personal credit score, provided you do not add your name to an account with poor history. But remember, this goes the other way, too. Should you get a divorce, close all joint accounts or remove your spouse's name. Your credit score will be affected by any late payments your ex makes.
  • Don't be afraid to look into your credit for fear of adding another inquiry, because checking your own credit report does not affect your score. Simply make sure you check via one of the bureaus or a legitimate score seller like Myfico.com, not through, say, a car dealership.
  • Your age, income and sex have no bearing on your score. Getting a raise will not help your score -- you need to pay off your debts.
  • Don't worry that those daily credit card offers you get in the mail are negatively affecting your score. They have no impact.
  • Many people think they have just one credit score. The truth is you have three -- one from each of the big credit reporting agencies. It is a good idea to check all three.

    • Mellody Hobson, president of Ariel Capital Management in Chicago (www.arielmutualfunds.com) is "Good Morning America's" personal finance expert.