By Andia Dinesen, AFC®
It is important to know the definitions of credit score and credit report. A credit score is a numerical representation of an individual’s credit worthiness. Your credit score can be different depending on how it is calculated and by whom, but one of the most popular scores is a FICO score. Your credit report is a report of all your credit history, payment history, loans, credit cards, and other financial and personal information.
All Americans who have a credit can receive their credit report for free once a year from each of the three reporting agencies, Experian, TransUnion and Equifax through www.annualcreditreport.com.
Recently the Consumer Financial Protection Bureau’s (CFPB) Director, Richard Cordray, called on the top credit card companies asking them to start providing credit scores for their customers, free of charge. This will be a huge step in the right direction when it comes to customers knowing more about their credit score and hopefully, in turn, their entire credit report. Usually an individual can only obtain their score for free if they are turned down for credit.
According to the CFPB statement less than 1 in five Americans checks their credit report in any given year. Checking your credit report is the best way to make sure your credit score is an accurate representation of your credit history and payments. Considering that a credit score is one of the main indicators that lenders use to determine an individual’s creditworthiness, it is very important that customers know what their number is, and the information that supports it. Checking a credit report from each of the main reporting agencies is free, as stated above, but your credit score is not and that is why Cordray is pushing to have the banks supply it to their customers. In addition, customers who obtain their credit score and realize that the credit score is lower than they were expecting can and should be digging deeper into what that credit score means. Logically, if you know your credit score and are curious about how you received that score, the natural thing to do would be to check your entire credit report. Inaccuracies in credit reports are quite common and can lead to potential losses in the tens (or even hundreds) of thousands of dollars if they go undetected.
Here’s a scenario:
David has a credit score of 690. Imagine David should have a credit score of 760 but because of an inaccuracy he has a credit score of 690. David applies for a loan. He is not turned down, but instead receives the loan at a higher interest rate. With a credit score of 690 he could get Auto Loan ‘A’ for $25,000 at 3.9% APR (which is pretty good). But if he had a credit score of 760 he could receive Auto Loan ‘B’ for $25,000 2.29% APR. For Auto Loan ‘A’ he would pay $2,557 in interest over a five-year loan or for Auto Loan ‘B’ he would only pay $1,483 in interest. That is a difference of over $1,000. If David were applying for a home loan/mortgage this difference could easily be ten times higher (over $10,000).
It is easy to see in this case why it would be important for David to know his credit score and view his credit report. He could have worked to correct the inaccuracies on his credit report prior to applying for a loan and saved himself potentially thousands of dollars.
Knowledge is power and this knowledge can help improve your understanding of your overall perceived credit worthiness, in addition to giving you the ability to review and correct potential inaccuracies An individual’s credit score is representative of their creditworthiness. As an individual, you need to know the information behind your credit score and be proactive in correcting inaccuracies on your credit report. Only you can know what should be in your credit report.
Get your free credit report at www.annualcreditreport.com
Active Duty or Spouse (Guard and Reserve)? You can get your credit score for free when you take the Military Saves Pledge.
Read Cordray’s letter: http://files.consumerfinance.gov/f/201402_cfpb_letters_credit-scores.pdf
FINRA Foundation information on credit reports and inaccuracies: http://www.saveandinvest.org/militarycenter/militaryfinancialtoolkits/manageyourdebt/p124934