Improve Your Credit

21 Questions About Credit

  1. What is your credit score? How is it calculated?

    There are many different types of credit scores. Most people are familiar with FICO scores, but there are also Vantage scores, CE Scores, Experian ScoreEX Plus Scores, TransRisk New Account Scores, and many others. Each is calculated differently and offers a different range of scores. Your credit score is a three digit number that is calculated based on information in your credit report. The number symbolizes the risk you pose to a potential lender and the likelihood you will back debts in a timely and responsible way. Your credit score is based on

    1. Payment History: Your record of paying your bills consistently and on-time.
    2. Amount You Owe: How much debt you have and how much available credit you have.
    3. Credit history length: How long ago you opened accounts, whether those accounts are still open and how long since the last activity?
    4. Types of credit used: The amount of debt that is revolving vs. installment. (see below for more information)
      1. Revolving credit: With revolving credit, like a credit card, you have a set spending limit known as your credit limit. As you pay back the money you owe, the credit limit goes back to what it was originally. For example, say you get a card with $1,000 limit. You spend $200, which means you have $800 available. Then you pay back that $200, so you have $1,000 available to you again. You can access that credit line as long as you continue to pay the money back.
      2. Installment loans: Installment loans, such as car loans or mortgages, are made for a specific amount over a set period of time. The payments are generally fixed at a certain interest rate, which doesn’t vary so long as you pay debt reliably. Once the debt is paid off, you no longer have that loan available to you, but you may own your house or car.
    5. New credit: How many accounts you have recently opened and how many inquiries do you have on your report.
  2. Is your credit score different than your credit report?

    Your credit score is based on the information in your credit report. If you have a good credit history, you will have a high score.

  3. What is a good credit score?

    Because there are so many different models, there is no one “good credit score.” You should check the ranges of the specific score you receive. However, to give you a general idea for FICO scores, the most commonly used scoring model:

    300-579 – Poor
    580-619 – Low
    629-679 – Average
    680-750 – Good
    750-850 – Excellent

  4. What is the difference between a FICO score and a credit score?

    FICO is not a credit reporting agency. In other words, companies do not report to FICO about how you pay your bills. Instead, FICO collects information from the three credit reporting agencies, Equifax, TransUnion, and Experian. FICO then analyzes the data and provides a score based on that analysis.

  5. What is the difference between Equifax, Experian, and TransUnion? Why do I have three different credit scores?

    Equifax, Experian, and TransUnion are all credit reporting agencies. Companies that provide you with credit (credit cards, loans, etc.), report back to these agencies about your payment behaviors. Do you pay on time? Do you pay consistently? How much do you owe versus how much credit is available? Because there are many credit scoring models, and each of them uses a different formula to calculate your financial risk, you will likely have three different credit scores. For example, one agency may put more value on timeliness of payment, while another may put more value on how much new credit you have. Scores fall within a range, and it’s more important to understand the information in the report and why you are in a certain range, rather than just knowing the score itself.

  6. How do I get credit if I don’t have any credit history or a credit score?

    It’s the chicken and the egg scenario, right? It may seem like it, but there are ways to establish credit and build your credit history. For example, a secured card enables you to pay a deposit up front, which acts as your credit limit. As you make purchases and pay down debt, you establish a credit history. But be careful. Make sure that the creditor is actually reporting the transactions to the credit bureau. Also, be sure to choose a secured card that has a low annual fee. A second way to establish credit is to have someone with a credit history put you on their account as an authorized user. While effective when used responsibly, this strategy can be somewhat risky for the person who has a credit history already. Any mistakes the authorized user makes also impacts the credit score of the credit holder. Be very careful about letting people be authorized users on your credit accounts.

  7. What will make my credit score go up or down?

    Once you understand how credit works, it is pretty simple to improve your credit score. The chart below shows what will likely make your score go up or down.

    Do this to make your score go up! Don’t do this or your score will go down: If you’ve already made a mistake
    Always pay your bills on time Miss a payment – even a couple days late may hurt Get current and stay current with your bills
    Keep your balances low Run up high balances you can’t afford – more spending doesn’t mean better credit Negotiate with your creditors to get your interest rates down so that your debt will become manageable.
    Pay off debt rather than moving it around Keep moving balances to keep yourself current Stop moving debt around. Keep it on the lowest rate card for 6-12 months.
    Keep accounts active Don’t close accounts you don’t need. This reduces your amount of available credit, which could lower your score. If you’ve already closed the accounts, the damage is done. Don’t open a new account unless you need to. When you are ready to open a new account, choose one with a low rate.
    Shop around for the best card with the lowest rates Don’t open a lot of new accounts at once Time will take care of this. Don’t close the accounts. Keep small, manageable balances that you can pay off easily.

    Always pay your bills on time Miss a payment – even a couple Keep your balances low Run up high balances you can’t Pay off debt rather than moving it around Keep accounts active Don’t close accounts you don’t Shop around for the best card with the lowest rates

  8. I think there is a mistake on my credit report. How do I fix it?

    If there is an error on your credit report, you need to write a dispute letter to the credit bureaus. Our counselors at the Financial Empowerment Centers can help you do this. It is helpful to have documentation that proves that there is an error. For example, if you have paid a debt off and it is still showing on your report, it is helpful to have either a zero-balance statement or proof of payment.You should also contact the actual creditor that is reporting the information, preferably in writing so you have a record. Continue to check your report to make sure the information has been removed.

  9. Someone stole my identity and my credit score went down. What do I do?

    Being a victim of identity theft can be scary and overwhelming. Our Financial Empowerment Center counselors can help you with the process, but it is best to take action quickly.

    1. Check your credit report regularly so that you know if there are any issues.
    2. As soon as you’ve discovered that someone has stolen your information, place an initial fraud alert on your credit by calling one of the credit bureaus. They must inform the other bureaus of the fraud.
      Equifax: 1-800-525-6285
      Experian: 1-888-397-3742
      TransUnion: 1-800-680-7289
      When you report the identity theft, ask for your credit report. Make sure you get one from each bureau.
    3. If you suspect your identity has been stolen by someone close to you who may be able to bypass security questions, you may want to consider a credit freeze. There may be a fee for this service and it may prevent you from using or opening new credit, but it will also prevent more purchases from being made fraudulently.
    4. File an ID Theft report with the Federal Trade Commission by going to their website or calling 1-877-IDTHEFT
    5. File and keep a police report. Often, this will serve as proof that you have been a victim of ID Theft. Make sure you send these to the credit bureaus as well.
    6. Contact any creditors and/or banks and notify them of the theft directly.
    7. Be sure to change your passwords online, especially if you don’t know how your information got stolen.
    8. Keep all records related to the incident.
  10. How does a bankruptcy affect my credit score?

    A bankruptcy will hurt your credit score. However the amount of the impact is unique to your situation. According to MyFico.com, someone with a score in the 700s will likely see their score dip by 100 points or more. However, if you already have a low score, then the dip may not be as extreme. Pull your report shortly after filing to make sure your creditors have reported only the debts that were included in the bankruptcy. A Chapter 13 bankruptcy should fall off your credit history after seven years, while it will take A Chapter 7 or 11 bankruptcy ten years to be removed. Therefore make sure you keep track of when you filed, so you can make sure it comes off your report at the appropriate time.

  11. How long does negative information stay on my credit report?

    It depends on the type of information.

    • Late payments: 7 years
    • Bankruptcies: 7 years for completed Chapter 13 bankruptcies and 10 years for Chapter 7 bankruptcies.
    • Foreclosures: 7 years
    • Collections: Generally, about 7 years, depending on the age of the debt being collected.
    • Public Record: Generally 7 years, although unpaid tax liens can remain indefinitely.
  12. I want to lower the interest rates on my credit cards. How do I do that and will it affect my credit?

    According to Bankrate.com more than 50% of people who ask for lower interest rates on credit cards get them. It’s that simple. If you call and ask nicely, your creditor will often give you a break by several percentage points, which can add up to hundreds of dollars in your pocket. There is no harm in asking. While your interest rate does not affect your credit score directly, your ability to pay debt does. If that debt is more affordable because you’ve lowered your interest rate, your ability to pay will go up, which may result in a credit score increase.

  13. What are inquiries and do they affect my score?

    Credit inquiries are requests by businesses to check your credit history. There are two kinds of inquiries.

    • Hard inquiries are used by businesses to check your credit if you have applied to them
    • Soft inquiries are credit checks that are not done by prospective lenders. Soft inquiries for a loan or a line of credit or credit card. Other companies such as cell phone carriers, cable TV providers, or auto insurers may also do a “hard pull” on your credit to decide whether to give you a service or how much to charge you. When you or a Financial Empowerment Center counselor checks your credit, your score will not be affected.
  14. How long does it take for my credit score to go up if I paid off a debt?

    It really depends on your situation. There is no fixed time for a credit score increase. Creditors report to credit bureaus at different rates. Some do it once a week, while others only report once a month.It also depends on what your overall credit situation is. For example, if you pay off one debt, but have run up another debt, you may not see an increase. However, if you are consistently paying on debt, you may see an increase in a couple of months. The best way to improve your credit score quickly is to go to a Financial Empowerment Center counselor who can look at your specific situation and make recommendations for improving your score in the quickest way possible.

  15. How can a young person build credit responsibly?

    New laws have made it more difficult for young people to get credit. These laws were put in place in 2009 because so many creditors were marketing cards to college students who really couldn’t afford them. Now, anyone who is under 21 must either show proof of income or have a co-signer on their account. The best way to start with credit is to get a secured card. These cards enable the young person to prepay the debt. With secured cards, you cannot overspend because the money simply isn’t there once you’ve hit your limit. Be sure that the cards have low annual fees. Also make sure that the creditor is reporting regularly to the credit bureaus, so you can establish your credit history. Similarly, a secured loan helps young people establish credit, and may be a good start for those not ready for a credit card.

    You can also become an authorized user on another person’s account. Typically, that person is a parent or guardian. While this is a great way of establishing credit, there is risk to the credit holder, since the activity and payment history associated with the authorized user impacts the credit history of both parties. Therefore, you need to be very careful before becoming involved in an authorized user relationship.

    Finally, young people can establish credit through student loans. However, it is very important to research how much the loan is, what the terms are, and investigate repayment options before making a student loan commitment. Unlike other debt, student loans cannot be discharged in bankruptcy.

  16. Do immigrants have credit scores?

    Credit histories are not transferred from one country to another. Therefore, an immigrant must establish a completely new credit history in the United States. The best way for a new immigrant to establish credit is to get a secured card. The card will have a pre-set limit which will be paid in advance by the immigrant. Be sure that the cards have no or low fees. Also make sure that the creditor is reporting regularly to the credit bureaus, so you can establish your credit history. Additionally, landlords may also agree to report rental payment history to creditors, especially if the landlord is part of a larger real estate business. Check with your landlord to see if they are willing to report your payments, but be aware that they are obligated to report both the good and the bad, so if you are late with rent, that information will be reported as well. It will generally take six to eight months to establish a score. The score may be low at first, but over time it will go up if you are using your credit responsibly.

  17. Should I close my unused credit cards?

    While there may be exceptions, in general it is not recommended to close credit accounts. Your score is calculated not only on how much debt you have, but how much credit you have available. This is called your “credit utilization rate.” For example, if you have a credit card with $1000 limit and you’ve spent $500 of that limit, then your utilization rate is 50%. Utilization is calculated for each individual card, as well as a total for all cards. For example, if you have three cards and each has $1,000 limit, your total available credit is $3,000. If you spend $300 of that across all cards, then your utilization rate is 10%. When you close cards, you lower the amount of credit available to you, which may increase your utilization rate, and lower your credit score. Closing cards also may eliminate a positive payment history, which counts towards a good score. However, if you are paying extremely high annual fees on a credit card you are not using, you may be better off closing it.

  18. How does co-signing a loan impact my credit?

    When you co-sign a loan, such as a student loan or mortgage, you are taking on the debt as your own. Generally, a lender requires a co-signer if there is a doubt that the original applicant can pay back the loan on their own. The co-signer is the “guarantee” that the debt will be paid back. Co-

    signing impacts credit just the same as if you had taken the loan out yourself. If the person you are co-signing for does not pay back the loan on time or consistently, that will negatively impact your credit as well. If the creditor sues to get their money, then the co-signer is sued as well. However, there are some precautions you can take to make sure your credit isn’t damaged by a friend or relative’s inability to pay. First, ask the lender to notify you if payments aren’t being made. This may prevent long-term damage to your credit. Second, ask the lender if you can limit your responsibility to the value of the loan itself and not any additional fees. Finally, ask the lender how you can get your name off the loan, especially once the primary borrower has established a history of good repayment history.

  19. Does it improve my score to have more credit cards?

    No, especially if you open them all at once. Opening multiple accounts in a short period of time is a red flag to credit bureaus that you may be having trouble paying your expenses with cash or you are spending irresponsibly. Opening accounts over time is not as damaging, so long as you keep track of your spending, don’t overspend and keep your balances low, while paying on time. However, if credit bureaus see many inactive accounts, that may hurt your score as well.

  20. How much will my credit score go down if I miss a payment?

    There is no specific amount that a credit score will decrease based on one action. Every creditor reports differently and every credit bureau calculates differently. This is true of increases as well. Unfortunately, there is no one answer. However, it is sometimes helpful to talk to the creditor directly. Is this is a one-time mistake and you have a solid credit history, they may be willing to forgive the error and not report it to the credit bureaus.

  21. If my debt is sold, what does that mean for my credit?

    The legal ability for a creditor to seek debt varies from state to state. In Pennsylvania, the Statute of Limitations is usually four years. So, if a client has not made a payment in more than four years, that creditor can no longer sue them to obtain a judgment on that debt. If they make a payment on that old debt, however, they give the creditor and additional 4 years to sue. During that time, if the creditor doesn’t think they will get their money from you, they may sell your debt to a collection agency. This could hurt your credit score substantially. The debt will then appear on your report as a collections account. After seven years, the debt should fall of your credit history and will no longer negatively impact your score. The 7-year clock starts ticking at the Date of First Delinquency on the original account. It does not reset when the account gets sold into collections. If the debt is still on your credit report after seven year, you can request that it be removed. If a creditor continues to try and collect the debt after it falls off the credit report, you can send a cease and desist letter to make them stop. Again, the Financial Empowerment Center counselors are very helpful when it comes to managing old debt.