Kamis, 06 November 2008

Credit Reports and Credit Scores

Cynthia Crawford, Ph.D.[i]
Robert O. Weagley, Ph.D., CFP®

There’s a lot of talk about credit reports and credit scores. Are they the same thing?

A credit report is the most important document in your life. Many people really do consider it to be that important to you in your financial life. If you’re astute at managing your money and have a very good record with regard to credit use, you may not even know your score. On the other hand, if you’re ever been turned down for credit – for a good purpose – you know very well that this little number can be huge.

One of our University of Missouri Extension colleagues, Janet LaFon, explains there are four pieces of information reported in your credit report:

  1. Identification. Basically, this information relates to who you are. Your current name and any other names you have used, as well as your current address and other residential addresses you’ve had in recent years, will be included. You’ll also see your Social Security number, date of birth and you may also find your employment history.
  2. Public information. If you have had any court judgments - if you’ve been evicted from rental property and/or gone through bankruptcy proceedings these will be included in this section.
  3. Credit information. Information about who your creditors are and whether you are paying them as agreed (or not). Paying bills on time is key to a positive credit report.
  4. Inquiries. Who’s looking at your credit report (you may be surprised)? A small number of inquiries is fine, dozens make potential creditors concerned.

Let’s switch gears from credit reports to credit scores. The Fair Isaac Corporation has developed a scoring system (called FICO Scores) that is currently the most used method of calculating credit scores. A person is assigned a score between 300 and 850, based on information in his or her credit report. This is not golf – the higher the score, the better.

Think of your FICO score as your financial grade. Instead of receiving an A, B, C, D or F, though, your grade is in the form of a number. A score of 723 is a C. That’s the median value for FICO scores in the US. A grade of B would be somewhere in the range of 760. An A+ would be 800 or more. Only about 2% of people have a score of 800 or more. Think of a 650 score as a D and anything below 500 as an F in paying bills on time.

You are entitled to a credit report, without charge, from each of the three major credit bureaus each year. Make sure you are going to the correct website to access your free credit reports! There are more than 100 rip-off sites. The correct site is http://annualcreditreport.com, or you can call 1-877-322-8228.

Many people think that consumers are eligible for a free credit score each year. Not so! Expect to pay around $10 for your credit score. About every four years, I get curious enough about what my FICO score is to pay the fee. It isn’t something I pay for each year.

Finally, which is more important to monitor, the credit report or credit score? That’s easy – the credit report is most important. A strong credit report results in a strong credit score. “Also,” mentions Janet LaFon, “it’s one of the best ways to find out if you are a victim of identity theft.”

- Robert O. Weagley, Ph.D., CFP(r)

Chair, Personal Financial Planning

University of Missouri

Columbia, MO 65211

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