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Understanding Credit Reports and Scores · Talking FACS

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Welcome to Talking Facts.
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What you need to know about family food finance and fitness.
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This nationally recognized award winning podcast is hosted by the University of Kentucky Family and Consumer Sciences Extension Program.
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Our educators share research knowledge with individuals,
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families and communities to improve quality of life.
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Hello and welcome to Talking Facts.
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What you need to know about family food finance and fitness.
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I am your host,
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Mindy mccully,
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Family and Consumer Sciences Extension Specialist for instructional support at the University of Kentucky.
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My guest today is Kelly May Senior Extension Associate for Family finance and resource management.
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Welcome,
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Kelly.
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It's so good to be here today,
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Mindy.
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It's getting close to the end of the year and we're thinking about our money,
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but maybe we aren't considering something that's really important to how our money works,
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which is our credit scores.
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So our topic today is understanding credit reports and credit scores.
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So let's address this first question,
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which is what is a credit report?
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Your credit report is a history of how you've used credit.
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So it it's got all the details about you and your credit used over time.
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It may include types and balances of accounts.
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So how much you owe it might include dates and accounts that,
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uh,
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accounts were opened.
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It'll have the payment history and this is maybe the most important thing.
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It'll show whether or not you've made payments on time and it'll go back pretty far.
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It'll,
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it'll keep a record of even if you missed it just that one time.
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It,
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it unfortunately still shows up on there and then it'll have a few other things like inquiry information.
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Have other people been looking at your credit to see how good it is and have you filed for bankruptcy or had other judgments against you?
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One thing about credit reports that,
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that maybe some people don't know is that mistakes can happen either on the part of the credit bureau or on the part of the uh company reporting to the credit bureau.
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So the lender,
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if something seems wrong on your report,
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you should talk to the credit bureau.
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Um I say talk loosely.
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It's usually a form or an email or something that you mail but do report it to the bureau because inaccuracies might be simple mistakes or it might be a sign of fraud or identity theft.
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So either way it's,
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it's really good to get that cleaned up on your record and to promptly report any suspected errors and they can investigate and correct those for you.
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But you talked about the people who look at our credit reports who can access your credit report.
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Oh,
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lots of people these days.
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So credit report started as a way to decide whether or not you should get a loan or a credit card,
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but now they're used for all kinds of things.
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So maybe somebody will pull your credit report when you get a new job or when you go to get insurance or when you look at a new apartment,
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you know,
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your landlord wants to know if you're gonna pay the rent on time.
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So maybe that person will pull your credit report any time you are looking for a,
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a credit product and your credit report is pulled for that.
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That's considered what they call a hard pull.
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That means you asked them to look.
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And so that will show on your credit report and that may um impact your score.
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However,
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there's something called a soft pull.
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And so if you've ever gotten those possibly annoying things in the mail that are blank forms that say you are preapproved for this credit card today and they want you to fill it out that's considered a soft pull because they have looked at your credit.
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They've decided that they want you to have a card because you are a good credit risk.
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So consider it a compliment,
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but still feel free to go ahead and shred that and,
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and uh not pay attention to that.
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Um,
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the soft pools do not impact your score.
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So if you see those on your report.
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Um,
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don't get upset about those.
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You can't help it.
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They're gonna look at your credit whether you want them to or not,
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but it does not impact your score so it will not hurt you either way.
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Ok.
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All right.
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Well,
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let's just move into then.
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How can I look at my own credit report?
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There are actually three credit bureaus in the US that provide credit reports.
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Uh,
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most well known Equifax,
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Experian and Transunion.
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And federal law allows everyone to request one free report from each,
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each year.
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So everybody gets three free reports per year.
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That's federal law.
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So that's all the time.
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But actually,
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right now,
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because of the COVID-19 pandemic,
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the credit bureaus have been letting people check their credit more often for free still.
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So through 2022 it may even be extended again.
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It's been extended several times,
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but at least through the rest of this year,
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all three bureaus are offering free weekly reports.
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So I would say everyone should check their credit report at least once a year and get it from all three.
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Uh But right now,
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if you have a reason to check it more often,
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you certainly can and that's available to you for free,
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the information can vary slightly between the three and I know that sounds crazy because we're the same person and we have the same credit,
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right?
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But what can happen is say you get a new credit card,
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that credit card is required to report to one of the bureaus.
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It might report to all three or it might report to only one and then if you get your car loan from somebody else,
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they might report to a different bureau.
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So you might have something show up on one that doesn't show up on the other two.
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And if you are,
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um,
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checking for mistakes or for fraud,
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you want to make sure you check all three because you know,
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you wouldn't want the fraud to be happening on the one you haven't looked at.
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Exactly.
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That makes makes good sense.
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And you know,
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we hear about these credit monitoring or credit websites that are,
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are gonna give you access to your credit scores or maybe even your credit card company is giving you access to your credit score.
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Is that the same as the credit report that we get from all credit report dot com?
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That is a great question.
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Oh,
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and I love that you threw that in there.
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The,
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the free credit reports are from annual credit report dot com,
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not any other site that's the official government sponsored site.
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Um and it is dot com which is unusual.
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So we'll put that in the show notes.
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But yes,
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your free report does not include your score and you can get your score from a couple of places.
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So like you mentioned,
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maybe your credit card um provides it as a service because they have access to it or maybe you have gotten a new loan recently.
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And so they sent you a copy of your score,
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but in general,
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your score is not free.
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If you uh subscribe to a service or one of those websites you were talking about,
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you might get your score through them.
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Um Typically it's not free.
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Um in a few instances it might be,
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but just remember if you are um paying for a service or you're subscribing to them,
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then,
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um,
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that's part of their paid service and it's not free.
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So interestingly,
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you don't need to know your score to check your credit report,
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your credit reports about the history and the score is about kind of a gauge of how well you're doing.
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But I'm gonna say this now and I'll probably say it again at the end.
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Perfection is not the goal.
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The focus is on improving your score and using credit wisely and mostly making on time payments,
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but don't get heartburn because your score is not perfect because it just simply won't be,
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I don't know that I've ever seen a perfect score.
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Um,
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it,
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and it's very easy if you get that as a service on your credit card statement and you see that,
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oh,
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it's gone up a point or down a point and,
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and it's easy to get frustrated or,
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or wonder what's happened and um,
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don't get too hung up on that because credit scores are a funny thing and they are calculated using a very complicated algorithm that the credit bureaus will not even share with um educators or the public.
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So we don't even know what this math problem consists of precisely.
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Um And there's actually more than one algorithm.
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And so they'll use a different math problem to figure out the score for a car loan than they would for a mortgage loan or a credit card.
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So you actually have multiple scores.
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Um,
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if you're getting it free through a service,
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uh,
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or if you're paying for it through service,
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it may be slightly different than when you go apply for a product.
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So,
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um,
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just know that somewhere in the range is what we're looking for and it doesn't have to be perfect.
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So we,
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I I I jumped again a little bit and brought up those credit scores,
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but let's talk about what makes up a good credit score,
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right?
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So the the score is the,
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the estimation of your ability to pay the money back.
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And so the most important part of that calculation is your payment history.
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So it's gonna be more than a third of what makes up your score looking at whether or not you pay on time or late.
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So the more often you pay on time,
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the better that part of your score is going to be,
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uh the next third is made up by the amount that you owe.
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And so they're looking at,
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how much debt do you have,
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uh,
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how many different accounts do you have open if you have a revolving credit such as credit cards?
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How much of that are you using?
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Are your cards maxed out or do you just use a little bit and pay it off right away or are you somewhere in between?
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And so that 2nd,
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3rd of your score is looking at all of those factors to see if somebody gives you new credit.
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Are you gonna use the heck out of it and run it up right away or are you gonna be able to use it over time and maintain it?
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And I know that some credit card companies are going to offer you opportunities to get their credit based on your credit score and your credit report.
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But what happens if you get too many of those?
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So there are so many things that impact your credit.
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So if you,
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if you open too many accounts that's gonna affect that uh amounts owed,
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um,
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it'll also impact the new credit percentage,
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there's a little bit of your score that's devoted to how much of this stuff is new.
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So,
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have you had this stuff for a while?
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Part of it?
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15% is length of credit history.
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So how long have you been a customer at each of these places?
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And then 10% is how much of it is new?
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So,
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are you the person that goes in every department store and opens the store card.
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I would not advise that because the rates are usually outrageous on those.
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You know,
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it's tempting to get a deal on something.
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Uh,
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but are you gonna use that over time because just opening that card,
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um,
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is going to impact your credit,
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it might go down because you have the new card.
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Or conversely interestingly,
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if you cut up a card,
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if you cancel a credit card,
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um,
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if you're trying to do it to improve your credit,
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it'll actually make your score go down for a slight time because your length of credit history is impacted by no longer having this account that you've had for a while.
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If you,
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if you need to get rid of a,
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a card or a loan,
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um,
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if it's always good to pay a loan off and have that off the books,
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um,
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but if you need to get rid of a card or other credit,
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that's fine.
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Do what you need to do,
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but just know that every little thing you do is gonna impact your credit for a brief time.
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But we're looking at over time,
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how steady is your ship sailing?
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Well,
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and I would like to recommend if you're going to get rid of a credit card.
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Look at that length of how long you've had,
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you know,
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maybe choose the card that you've had a shorter amount of time as opposed to something that you've had,
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you know,
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for 10 or 15 years because that,
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that will have less impact than if you get rid of that long term.
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And how much credit is on it is the other,
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you know,
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that amount owed is also looking at how big your potential balance could be.
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So,
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but,
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um,
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you know,
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even if you don't max it out,
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you have the ability to put however many hundreds of thousands of dollars on that card.
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And so that's part of what they're looking at.
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And also the longer you have some credit cards in my experience,
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you know,
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every few months or so,
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they'll say we're gonna bump up your credit limit.
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And so if you've had that card for a long time,
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then it might have a,
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a much higher limit.
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And so that gives you more access,
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but that doesn't mean you have to use it.
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Right.
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Yeah.
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And just because they offer to,
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to increase your limit doesn't mean you have to accept,
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you know,
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you can tell them.
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No,
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I,
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I'm fine with the limit.
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I have,
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I'm not,
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I'm not really using that right now or if you need it,
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you know,
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it's,
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it's a personal choice.
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You decide whether you need it or not.
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So if you need it,
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go ahead.
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But if you don't tell them no.
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Yeah,
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that's a good,
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very good point.
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Kelly,
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what have we not talked about that we need to talk about in relation to our credit score?
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The question I always get is what is a good score?
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And I put good in quotes because it really,
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it,
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it depends and some of the credit bureaus won't even tell you what a good score is.
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A couple of them,
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one of them uses a different scale than the others.
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Um,
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but generally they range somewhere between 308 50.
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And if you um are a participant in our big Blue Book club and you read the book by Axton Beck Hamilton,
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she talks about when she got her first credit report,
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it was like 3 50 she thought,
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oh,
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that sounds kind of good.
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You know,
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you get 100 on a test and that's perfect.
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So,
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um,
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but actually,
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it was quite terrible because she was a victim of identity theft.
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So hers was about almost as low as it could be unfortunately.
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And,
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and she,
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um being a finance expert has improved her situation immensely since then.
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But that was certainly a learning curve.
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I,
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I hope our listeners aren't dealing with that now.
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Um I hope that you can be somewhere in the,
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the mid to high range.
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But,
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uh,
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what we're shooting for here is,
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uh,
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somewhere above 6 70 maybe.
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Um So roughly the,
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the 300 to 5 79 is considered poor,
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um,
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above 5 80 to almost 600 or um,
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almost 706 169 it says on here is bare.
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So 6 70 above is good.
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Uh 7 40 above is very good and then of course,
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800 is excellent,
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800 to 8 50.
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And again,
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we're not trying to be perfect.
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Uh These are gonna fluctuate over time.
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Um It's gonna depend on what they're calculating to figure out what the score is.
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And it's more about just getting your score as good as it can be and using credit wisely and making those payments on time.
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So don't max out your cards and pay them off when you can.
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I think that is great advice and I love that you brought up the fact that different loan products figure out the uh score differently.
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And so if you're looking at a mortgage or if you're looking at a car loan,
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you're gonna have different scores and even on the same day,
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you can have different scores,
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right?
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So if you get caught up in the score thing,
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then that might cause unnecessary anxiety.
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Exactly.
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Not,
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not,
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this is what we don't need.
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We don't need any more anxiety.
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Kelly,
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thanks so much for joining us today.
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I know that this is going to be great information for our listeners.
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Thanks for having me.
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Well,
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we're,
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we're always happy to have you.
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You always share such great and wonderful things.
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