To understand money, it helps to understand credit. Today, big ticket items, like homes and cars, usually require a loan in order to purchase them.
Every consumer who has opened a credit account somewhere has a credit report and a credit score. Understanding both can help you be a better money manager. The Federal Reserve has compiled this helpful consumer guide.
Your credit report tells your credit history. It lists all the credit accounts you have, or had in the past. It indicates what the balance is and whether they are in good standing.
It will also show any existing public record involving you and your finances. If there is a court judgment against you, tax liens against your property, or bankruptcy, they will show up in your credit report.
A credit report will also contain a list of people or companies that recently requested a copy of your credit report.
Why it's important
Here's why your credit report is important: banks, insurance companies, prospective employers, and a lot of other people you interact with may get a copy of your credit report. What they look for is evidence of how you manage money.
A lender looks at your credit report to decide whether or not to lend you money. Insurance companies may adjust your rate depending on what they see in your credit report.
Prospective employers, if you give permission for them to review your credit report, may base their decision on whether or not to hire you by what they see in your credit report.
Service providers and landlords will also take a look at your credit report before doing business with you, so having a clean report is important.
The information contained in your credit report is used to assign you a credit score. That way, someone reviewing your credit history knows at a glance whether you have excellent credit or just fair.
Adding up your credit score
There are a number of factors that go into a credit score, but perhaps the most important – and the one you can most easily control – is whether you pay your bills on time. Paying every bill on time, every month, will push up your credit score faster than anything you can do. Having one or more debt collection actions against it will drag it down faster than anything else.
Having too many accounts open – or too few – can bring down a score. Tapping out the credit limit on a credit card will do the same.
By law, every consumer is entitled to review copies of his or her credit report compiled by all three credit reporting agencies each year. It's free, and you can start the process at www.annualcreditreport.com.
Getting a copy of your FICO credit score is not free, but can usually be obtained for a small fee.