What Everyone Should Know About Credit Reports and Scores

Dear Credit Score Report readers,

Let me get right to the point: More than likely, this will be my last column for CreditCards.com -- at least as a full-time columnist. Shortly, I'll be moving on from CreditCards.com to a job with the University of Texas business school.

So for my last column, instead of responding to a reader's email, I'm addressing a letter to you, the readers -- a letter that attempts to summarize what I believe to be the key information consumers need to know about credit scoring and reporting.

Don't freak out about your credit score

I'll begin with a key point: Don't be overly concerned with your credit score. It can be a serious challenge to ever really "know" that number. That's because these scores vary based on when they are calculated (since they originate from a momentary snapshot of your credit report) and the scoring model itself. (There are many scores out there, including FICO, VantageScore, proprietary models and "educational" scores that aren't used by any lenders). Your credit score number can -- and does -- vary from day to day and lender to lender. As a result, at a given moment in time, it's extremely difficult to truly "know" your credit score with any certainty.

So instead of placing emphasis on that score, focus on your credit reports. Those reports are the basis for lending decisions, regardless of the scoring model used. In some cases, they are even used for hiring decisions. Note that I said "credit reports" -- plural. That's because you've got a report with each of the three major credit bureaus (Equifax, Experian and TransUnion) that maintain a record of individual U.S. consumers' borrowing behavior. Unless lenders tell you, it's difficult to know what report they may be working with. Since the information listed in those bureaus' reports can differ, you need to look at each one for a complete picture of where you stand.

These reports are available for free or for purchase. Don't want to pay? You can get each of those reports for free every 12 months at AnnualCreditReport.com, so by staggering when you get the free copies, you can check the report from a different bureau every four months. If you've already gotten all of your free copies, you can pay for these reports as well. However you choose to access your credit reports, please do so. They're important, particularly if you're planning to apply for a loan in the near future.

What are you looking for on those credit reports? Errors, for starters. Many reports contain mistakes -- some of which can ruin your reputation as a responsible borrower. For example, a report may incorrectly list a delinquent account that isn't actually yours. Once mistakes have been found, be sure to dispute any such errors. Realize that policing these reports is up to you, since the banks and credit bureaus typically don't have much reason to fix mistakes on your behalf unless you demand it. So you must protect yourself. Meanwhile, use your credit reports as a guide to improving your borrowing behavior. For example, your report may show a card account that you have long forgotten and have missed payments on. Discovering that card gives you a chance to get current with your payments, which will help your credit score in the long run.

If choosing a credit score, pick FICO's

If you are still determined to see your credit score, choose the FICO score. That's because it remains, by far, the most popular score with U.S. lenders. Decisions, such as whether to lend you money and how much interest to charge, are based on the FICO score more frequently than any other single score out there.

Where can you get a FICO score? You are entitled to a free FICO score when lenders who use that score deny you for a loan or don't give you the best terms. Also, certain credit unions and banks make the FICO score available for free to customers, but that's not very common. Begin by checking with your existing lenders to see if they can supply you with a FICO score.

Otherwise, you'll need to pay for your score -- which currently carries a price tag of $19.95 -- at myFICO.com. (Note that FICO scores based on your credit reports with TransUnion and Equifax are available for purchase; Experian-based FICO scores aren't currently available to consumers.) FICO scores range from 300 to 850, with a higher score suggesting to lenders that you are a low-risk borrower and more likely to repay any loans.

The road to a better credit score

For most of us, our score isn't as high as we'd like it to be. To improve your FICO score, focus on the basics: Always pay your bills on time (even non-financial bills like cell phone payments, since many companies will turn your account over to collections agencies if you don't pay, which in turn end up on your credit report) and keep debt levels as low as possible. You should also avoid opening new credit accounts unnecessarily, since the resulting "hard" credit inquiries appear on your credit reports and can lower your score.

In conclusion, while there's much about credit reporting and scoring that is esoteric and confusing, it doesn't have to be. As long as you strive to be a careful borrower and keep an eye on your credit reports, when the time comes to apply for a loan, you'll be more likely to be approved. And that, at the most basic level, is what having good credit is all about.

Good luck!