Things You Should Know About Credit

Where did Consumer Credit originate?

Credit reporting originally started in the early 18th century in England. A group of tailors got to together to trade information about customers who failed to pay their debts and eventually started a monthly newsletter with the information for the public to see. Not too long later the United States adopted this strategy and eventually The Retail Credit Company was founded, they eventually changed their name to Equifax –they are the oldest out of the three major credit bureaus in the United States today.

What's the difference between a credit report and a credit score?

A credit report contains all of the information about your payment history, account balances, current and past accounts as well as recent credit applications –kind of like a resume but for credit.

 

A credit score is the three-digit number which summarizes your creditworthiness based off the credit history found on your credit report. Depending on the scoring model you're looking at your scores can range from a 300 to an 850, the higher your score, the better.

What makes up a credit score?

Often times people think their income or employment play a large part in their credit score. This couldn't be further from the truth, the credit scoring models on consider the following when they calculate your credit score.

 

Payment History: This is the history of how consistently you pay your bills on time and impacts 35% of your credit score.

 

Credit Utilization: This is your balance owed on your revolving lines (typically credit cards) versus the limit available and impacts 30% of your credit score.

 

Length of History: This is how long you've had your accounts open for, the longer the account has been open the better and impacts 15% of your credit score.

 

Credit Mix: This is your mixture of revolving accounts and installment accounts, it's important to show you can use both account types responsibly and impacts 10% of your credit score.

 

New Credit: This is your history of opening and/or applying for new accounts, this impacts 10% of your credit score but can make you look risky if you apply for new credit unnecessarily.

Why are my scores different when I use different apps or when a lender pulls credit?

Not all creditors report account updates on the same day. They also aren't required to report account information, they do so voluntarily and can choose which bureaus to report to. This can result in your credit reports not containing the same information.

 

Your scores might also vary depending on what scoring model you or your lender are looking at. Most lenders use one of the FICO scoring models to qualify you for a credit card, auto loan or home loan. Often times free apps or even paid apps use a Vantage scoring model, these are referred to as educational scores and are typically higher than the scores a lender will pull.

Who uses Vantage scoring models?

Credit Karma, Credit Wise and most consumer credit monitoring companies use Vantage scoring models. These are referred to as educational scores and should be used to help you monitor your credit for errors, new accounts and to help protect yourself from fraud. Often times, these scores will not match the credit scores a lender sees when they pull your credit report during the loan application process.

Who uses FICO scoring models?

If you're applying for a credit card, auto loan, personal loan or a home loan your lender will more than likely pull your FICO scores. There are over 20+ FICO scoring models and different scoring models may be used based on the type of credit you are applying for. Click here to check out the different FICO scoring models!

Why is having good credit important?

Your credit history is your financial resume that shows how responsible you are with borrowing money and paying it back on time. The better your history, the less of a risk you are and the more likely you are to be approved.

Does checking my credit cause my scores to drop?

No! Checking your own credit does not lower your credit score. When you check your own credit it is called a soft inquiry and will not lower your credit score or add an inquiry to your credit report. You can check your own credit as often as you would like without damaging your scores.

How many points will I lose if a lender checks my credit?

If you authorize a lender to pull your credit for a loan it is called a hard inquiry and can decrease your scores by 5 points or less after credit is pulled. Hard inquries remain on the credit report for 2 years, but are only a factor for the first 12 months. 
If you're applying for a home loan or an auto loan you can have credit pulled multiple times within a 14 day window and it will only be counted as one hard inquiry, however you will see an inquiry for each of the lenders listed on your credit report that you authorize to pull credit. This exception does not generally apply to credit cards or other types of loans.

Do all negative marks automatically fall after 7 years?

Unfortunately, not all negative marks fall off your credit report within seven years. The good news, they don't stay on your credit report forever and often times no longer impact your credit scores after 12-24 months (depending on what it was). Here's a quick breakdown of how long negative marks can remain on your credit report:

 

Authorized Hard Inquries: 2 years

Late Payments: 7 years

Collections: 7 years 

Foreclosures: 7 years

Short Sales: 7 years

Chapter 13 Bankruptcy: 7 years

Chapter 7 Bankruptcy: 10 years

Money Owed to the Government: 7 years

Unpaid Taxes and Student Loans: Indefinitely

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