Financial Fundamentals: Managing and Monitoring Credit
Most consumers are aware that credit is important, but they may not know how to check their credit, actively manage it or improve their scores. Here are some tips for doing just that.
Credit report vs. credit score
Simply put, a credit report is a summary of a person’s history of paying bills. Every credit account that someone has ever opened will appear, whether it’s a mortgage, store credit card or a vehicle loan. There will be some identifying data, such as name, Social Security number, telephone and address. Public record information, such as foreclosures, judgements and bankruptcies, will also appear. Perhaps most importantly, the report will note payment history, including whether the person paid bills on time or late.
Consumers don’t have just one credit report. They actually have three, because there are three credit bureaus — Experian, Equifax and TransUnion — that act as nationwide clearinghouses for financial data. These reports may be similar but not identical since creditors may not report to the same agency.
A credit score, on the other hand, is a three-digit number that originates from information in a person’s credit report. There are five components: payment history, credit utilization, length of credit history, credit mix, and new credit. There are several different types of credit scores that lenders may examine, but the most common one is the FICO score, which ranges from 300 to 850. The higher the score, the better.
Look beyond the number
Many service members believe they know their credit score, but numbers can be deceiving. Not only are there several different types of credit scores, but the free scores provided by a bank, credit card or website often aren’t the same scores that lenders typically use.
The other issue is that focusing on the number alone can be misleading. It’s important to see a score in the context of the entire credit report. Consumers should pull their credit reports at least once a year to check for errors or fraud.
Under the Fair Credit Reporting Act, consumers may pull one free credit report from each bureau per year for a total of three reports. A strategy for keeping on top of things is to spread the requests throughout the year, getting one from each agency in turn.
Consumers should pull reports from only the official website, AnnualCreditReport.com. Beware of imposter sites. Once they receive their credit report, they can purchase their credit score from the site for a small fee. Military members can go to their installation’s personal financial manager or personal financial counselor for information on obtaining their credit score.
Once they have their credit report, consumers should check it for accuracy and immediately report any errors or evidence of identity theft to both the bureau and the reporting creditor in writing. The agencies must investigate a valid dispute within 30 days.
Consumers are now able to place a free credit freeze on their accounts to make it harder for identity thieves to steal their information. This is in addition to the active-duty alerts that are already available to deployed service members.
Keeping score: how to raise or maintain a credit score
The biggest tip for maintaining a good credit score is to pay all bills on time. Negative items such as late payments, Chapter 13 bankruptcies and civil judgements generally stay on a credit report for seven years, but Chapter 7 bankruptcies and unpaid tax liens can remain for 10 years.
If payment for a bill is late, it is important not to get discouraged. While the score may dip, it will eventually rise again once a pattern of on-time payment is re-established.
It is also important for consumers to monitor their credit utilization, especially if they are considering applying for credit in the near future. If a person has a credit card with a $1,000 limit and charges a $750 tablet on that card, they have used 75 percent of the available credit. Even if they intend to pay off the bill on or before its due date, the high percentage of credit utilization can be a red flag to potential lenders. Consumers can proactively pay off their balances ahead of time if they know they will be applying for credit soon.
Service members should also be selective when they shop for credit. Applying for multiple lines of credit over a short period of time will cause credit scores to drop. Lenders generally understand, though, that consumers will want to compare several mortgage or vehicle loan offers.
Credit misconceptions
Some people believe they must carry a balance on their credit card to maintain their score. This is not true at all. In fact, paying off a credit card in full each month is responsible credit usage and keeps credit utilization low.
Another common misconception is that old credit cards, perhaps store accounts that are no longer in use, should be cancelled. Canceling one’s oldest credit card accounts effectively shortens credit history, and that can actually have a negative impact on a credit score.
Closing credit cards also reduces available credit, which can make credit scores drop. Note, though, that if a person cannot responsibly use credit, then closing the card is probably a better option than making late payments or missing payments.
Some people are also afraid to pull their own credit reports, fearing it will affect their scores. When an individual pulls their own report, however, this is known as a “soft” pull and has absolutely no impact on credit score. Applying for credit, on the other hand, is a “hard” pull and, as previously mentioned, will cause a score to dip.
Be proactive
Military life comes with a lot of moves and address changes, which can open the door for possibly missing bills or experiencing fraud. It’s important for service members to monitor their credit reports and actively manage their own credit. Military members can also seek their installation’s personal financial manager or personal financial counselor for help with interpreting their report, improving and maintaining their credit standing.
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