People often ask me: if you have so many credit cards, doesn’t that mean your credit score must be low? Actually, it’s the exact opposite. I currently have about two and a half years of credit history and hold a total of 16 credit cards. My scores from the three major credit bureaus are: 779 (TU), 775 (EX), and 767 (EQ). With scores like these, I should be able to qualify for the lowest interest rates when applying for a loan. In reality, credit reports and credit scores are not mysterious at all. Once you understand how they work, anyone can earn a good score.
[4/20 Update] The VantageScore model, created jointly by the three major credit bureaus—Experian, TransUnion, and Equifax—will change, with the updates taking effect in the second half of 2017. Here is a summary:
- Adds long-term debt and repayment history: People who pay off their balances in full each month will score higher than those who only make the minimum payment over time. Long-term repayment habits will also be factored into the score. The main consideration is the ratio of debt to total available credit.
- Greater impact from high credit limits on credit scores: People with especially high credit limits may be viewed as higher risk, which could lower their overall scores.
- Changes to how medical debt affects scores: Previously, people could see their scores drop because medical debt appeared before insurance payments were processed. Under the new model, scores for these consumers will rise.
- Major changes coming to how your credit score is calculated - full article
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What are credit scores and credit reports used for?
- They affect your approval odds for credit card applications, including instant approval chances.
- They determine the interest rate you can get on loans.
- They influence what credit card offers issuers send you.
What is a credit report?
A credit report is, simply put, a report that records information related to your credit. The following items typically affect your credit score:
- Credit card history (every card, including authorized user cards)
- Credit limit
- Payment history
- Card opening/closing dates
- Loan history
- Bank inquiry records (HP)
- Inquiries generated when applying for a credit card
- Inquiries generated when requesting a credit limit increase
- Inquiry records for mortgages, auto loans, and cellphone contract applications (HP)
- Negative records such as bankruptcy and delinquent debt
Who provides credit reports?
There are three main credit bureaus that provide credit reports:
- Experian
- TransUnion
- Equifax
All three bureaus collect your credit card history, loan history, and bankruptcy or delinquent debt records. However, as mentioned above, inquiry records (HP) depend on which bureau a bank or auto dealer chooses to check. That means inquiry records can differ significantly among the three bureaus.
What is a credit score?
A credit score is a number calculated based on your credit report. Each bureau uses the credit report data it has on file to generate a credit score for you. This gives banks a simple, quantitative way to evaluate your credit without having to examine your full credit report in detail.
A credit score is generally weighted as follows:
- Payment history (35%)
- Whether your balances are paid on time
- Amounts owed (30%)
- Credit card balances
- Loan balances
- Length of credit history (15%)
- Average age of your credit cards
- Length of your loans
- New accounts (10%)
- Newly opened credit cards
- Newly originated loans
- Credit mix (10%)
- Credit cards
- Loans
Two common credit scoring models are:
- FICO: Provided by Fair Isaac Corp. This score is commonly used when approving loans and determining your interest rate. It is also often used as a benchmark for credit card applications.
- VantageScore: Created jointly by the three major credit bureaus—Experian, TransUnion, and Equifax. Last year, this score was reportedly used in applications for 8 billion accounts.
How can you improve your credit score?
Things that increase your credit score: paying on time, keeping balances low > longer credit history > more types of credit
Things that reduce your credit score: collections and bankruptcy > unpaid debt > opening new accounts > hard pulls from credit card applications / credit limit increase requests > hard pulls from mortgage and auto loan applications > hard pulls from cellphone contracts and internet service applications
Because credit scoring models vary and are not publicly disclosed, I can only offer a few suggestions based on my own experience:
- Always pay on time (pay your statement balance in full before the due date).
- Before each statement closes, lower your balance to 1%-5% of that card’s credit limit.
- Don’t let every credit card report a balance (having balances on just 2-3 cards is enough).
- Hold a reasonable number of credit cards (this builds credit history and reduces the impact of new accounts).
- Don’t close your earliest credit cards (this helps increase your average age of accounts).
- Don’t request credit limit increases casually (they may trigger an HP).
- Think carefully before applying for a card (whether you need it, whether you are likely to qualify, and never apply recklessly).
- Add different types of credit (such as an auto loan or student loan).
- Check your credit reports regularly (to see whether there is any incorrect information).
How to get free credit reports and credit scores
- Credit reports from the three major bureaus (available once per year; I strongly recommend getting them)
- CreditKarma provides TransUnion and Equifax credit reports and reference-only scores (nice interface, updates quickly, but the scores can differ quite a bit from your real scores)
- Credit Sesame provides a TransUnion credit report and a reference-only score (just okay)
- Citi credit cards provide an Equifax credit score (with a historical chart you can view)
- Chase Slate credit cards provide an Experian credit score
- Barclays and Discover credit cards provide a TransUnion credit score (with a historical chart you can view)
- AMEX provides an Experian credit score
All of the methods above require an SSN in order to check and access them.
Conclusion
For people who play the credit card game, credit reports and credit scores are foundational knowledge. This article is only a basic overview of credit reports and credit scores. More in-depth analysis and related credit card application strategies will be covered in future articles.