Insights

Your Top 10 Credit Questions Answered

April 14, 2022
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Certified Credit

Credit plays an important role in today’s world. Loans and credit cards can help you achieve financial goals that you couldn’t reach otherwise. For example, they can help you purchase a home, finance a new business venture, or simply afford day-to-day expenses when money is tight.

Since credit is such a useful tool, many people have questions about how it works. Unfortunately, credit management isn’t traditionally taught in school. Many adults have to learn about it as they navigate the lending space in real-time.

Below, we’ll answer ten frequently asked credit questions to help you become a more informed credit consumer.

1. What’s the Difference Between a Credit Score and a Credit Report?

Lenders don’t give out money to everyone who applies. Most lenders will only approve borrowers for credit if they display a willingness and capability to pay back their debts on time.

Two tools lenders use to evaluate applicants’ creditworthiness are credit reports and credit scores:

  • Credit report – A credit report is a comprehensive report that contains all of the information about your credit history, including your payment history, credit account balances, past and current credit accounts, and recent credit applications.The three major credit bureaus (TransUnion, Equifax, and Experian) are responsible for generating consumer credit reports.
  • Credit score – A credit score is a three-digit number between 300 and 850 that summarizes your creditworthiness. The higher your credit score, the better. Credit scores are calculated based on the information contained within your credit reports.

2. Why Do I Have So Many Different Credit Scores?

Many people talk about their credit score as if they only have one at any given time. The truth is that you can have hundreds of credit scores simultaneously.

Your credit scores will vary, depending on the:

  • Credit report used – Each of the credit bureaus receives different information from your lenders. For example, your credit card issuer may only report to Equifax and Experian, but not TransUnion.As a result, each of your credit reports may look a little different. Your credit score will fluctuate depending on which credit report is used during its calculation.
  • Credit scoring model used – Credit scores can also be calculated using different credit scoring models. FICO and VantageScore are the two most common credit-scoring models used in the United States, but there are hundreds of others out there.[i] Each credit scoring model may weigh aspects of your credit activity differently, leading to slightly different credit scores.

Type of credit application — Different credit scoring models may be used based on the type of credit you apply for. For example, a mortgage application may use a different credit scoring model than an auto loan application, resulting in different credit scores.

If you check your own credit score, you’ll most likely receive your educational credit score. Educational credit scores help you to monitor your credit. However, they don’t match up with the credit score your lender will see when they pull it during a formal loan application.[ii]

3. What Factors Affect My Credit Score?

Some people assume that your credit score is impacted by your income, savings, employment, or marital status. However, credit scoring models don’t take any of these factors into account when they calculate your credit score.

The only factors they consider are your:

  • Payment history – How consistently do you pay your bills on time?
  • Credit utilization – How much of your available credit are you currently using?
  • Length of credit history – How long have you had your current credit accounts?
  • Credit mix – Have you used a combination of revolving and installment credit accounts?
  • New credit inquiries – Have you applied for new credit recently?

With these factors in mind, the key to earning a high credit score is:

  • Making all of your payments on time
  • Only using a portion of your available credit (ideally, 30% or less)
  • Keeping old credit card accounts open for as long as you can
  • Getting experience with a variety of credit accounts
  • Avoiding applying for new credit unnecessarily

4. What is a Tri-Merge Credit Report and How Does it Work?

Mortgages are one of the riskiest types of loans for lenders because they consist of hundreds of thousands of dollars. That’s a substantial amount of money to loan out. In turn, most lenders are very careful about who they approve for mortgages.

During the mortgage application process, lenders will often look at tri-merge credit reports, also known as three-bureau reports. As their name suggests, tri-merge credit reports combine the information from all three of your credit reports (TransUnion, Equifax, and Experian) into one, offering lenders a more accurate look into your credit activity.

You typically can’t request to view your own tri-merge credit report. However, you can request a free copy of your credit report from each of the credit bureaus once a year on AnnualCreditReport.com. You can also access your Equifax credit report for free six times a year. You may be able to get an additional free copy of your credit report directly from the credit bureaus under the following circumstances.[iii]

  • You received an adverse action notice based on your credit report
  • You’re unemployed and intend to apply for a job in the next 60 days
  • You’re relying on public assistance
  • You’re credit report has errors due to fraud or identity theft

You received a fraud alert on your credit report

5. Why Do I Have to Pay to See My Credit Score?

While you’re entitled to a free copy of your credit reports, federal law does not guarantee that you can access your credit score for free. Credit scoring companies and credit bureaus are allowed to charge for it, unless you fit the criteria outlined above.

Even so, it’s possible (and increasingly easy) to access your credit score for free. Most credit card companies will let you view an educational credit score for free within your online account. You can also check your credit score for free from third-party websites, such as Credit Karma or Credit Sesame.

While educational credit scores are useful tools for understanding your creditworthiness, you shouldn’t fixate on the exact number, as it won’t be the number lenders see when they calculate your credit score.

6. How Can I Improve My Credit Score?

Raising your credit score before you apply for a loan or credit card can help you boost your chances of getting approved and receiving favorable terms, like lower interest rates and larger credit limits.

So, what steps can you take to improve your credit score? In addition to making your payments on time and maintaining a low credit utilization, you can boost your credit score by:

  • Becoming an authorized user on someone else’s credit card account, as long as they have a solid credit history and continue to pay on time
  • Disputing any errors on your credit reports
  • Keeping old credit card accounts open
  • Taking out a secured credit card or credit-builder loan

We go into greater detail on how to raise your credit score in the following articles:

7. How Do I Dispute Something on My Credit Report?

It’s estimated that over one-third of Americans have errors on their credit reports.[iv] While lenders and credit bureaus do their best to report accurate information, mistakes happen.

Inaccuracies on your credit report could be lowering your credit score. Fortunately, you can dispute errors with the credit bureaus directly. They are required by law to investigate the situation within 30 days of your request.[v]

Here’s how you can dispute an error on your credit report:

  • Contact the credit bureau online or by mail
  • Identify the error and explain why it’s inaccurate
  • Provide documents to verify your claims
  • Wait for the credit bureau to complete its investigation

If the credit bureau concurs that the information is inaccurate, they will adjust your credit report accordingly.

8. Does Checking My Credit Score Really Bring it Down?

One of the most common credit misconceptions is that checking your credit score can lower it. This is not the case.

The confusion surrounding this issue stems from people mixing up hard inquiries and soft inquiries:

  • Hard inquiries – Hard inquiries take place when you apply for new credit. Hard inquiries can reduce your credit score by a few points for a few months.
  • Soft inquiries – Soft inquiries take place when you or someone else looks at your credit score in the absence of a formal credit application. Soft inquiries don’t impact your credit score.

Since checking your personal credit report only results in a soft inquiry, you can review it as often as you want.

9. Do Negative Items Automatically Come Off After Seven Years?

Even if you try your best to manage your credit properly, you may miss a payment at some point. If you face more serious financial hardship one day, you may even have to declare bankruptcy.

Late payments and bankruptcies are two examples of negative items that can get listed on your credit reports. Negative marks can drag down your credit score. Some have a more damaging effect than others. The good news? Negative marks don’t stay on your credit reports forever. They eventually “fall off,” at which point they will no longer impact your credit score.

Here’s the amount of time it takes for the following types of negative marks to fall off your credit report:[vi]

  • Hard inquiries – 2 years
  • Late payments – 7 years
  • Collection accounts – 7 years
  • Foreclosures – 7 years
  • Short sales – 7 years
  • Judgments – 7 years
  • Chapter 13 bankruptcies – 7 years
  • Chapter 7 bankruptcies – 10 years
  • Money owed to the government – 7 years
  • Unpaid taxes or student loans – Anywhere from 7 years to indefinitely

As you can see, some negative marks stay on your credit report for longer than seven years. What’s more, they don’t always fall off automatically. You may have to request to have certain items removed once the appropriate amount of time has passed.

10. Will Closing a Credit Card Account Help My Score?

After paying off a credit card and closing the account, you may assume that you’ll receive a credit score increase. Unfortunately, closing a credit card account doesn’t boost your credit score—it may actually reduce it.

Here’s why:

  • It may increase your credit utilization ratio
  • It may reduce the variety of your credit mix

Due to these consequences, you may want to hold off from closing old credit accounts if you can.

Become an Empowered Credit Consumer With Certified Credit

Now that you know the answers to these ten credit questions, you can manage your credit accounts properly and take the right steps to optimize your credit score.

To learn more about credit, check out the Certified Credit blog.

 

[i] Debt.org. What is a Credit Score & How is it Calculated?

https://www.debt.org/credit/report/scoring-models/

[ii] CreditCards.com. FICO scores vs. “educational scores.”

https://www.creditcards.com/credit-management/free_credit_scores-fico-educational-1270/

[iii] FTC. Free Credit Reports.

https://consumer.ftc.gov/articles/free-credit-reports?msclkid=83edb871ba8f11eca40403c56587163b

[iv] CNBC. A third of Americans found errors on their credit reports. Here’s how to fix those mistakes.

https://www.cnbc.com/2021/06/11/how-to-fix-those-mistakes-on-your-credit-report.html

[v] FTC. Disputing Errors On Your Credit Reports.

https://consumer.ftc.gov/articles/disputing-errors-your-credit-reports

[vi] Bankrate. When does debt fall off your credit report?

https://www.bankrate.com/personal-finance/debt/when-does-old-debt-fall-off-credit-report/