Understanding Your Credit Score and Report

In simplest terms, credit is money you borrow and promise to pay back with interest. Types of credit include revolving credit, such as credit cards; automobile and personal loans; and home purchase, refinance and equity loans. Having access to credit is important, as it can be useful in times of emergencies, is sometimes more convenient than cash, and allows you to make large purchases. However, misusing credit can cause financial problems.

Your personal credit report is a summary of information on file with a credit bureau, a company that collects data about how people handle credit. The three major credit bureaus are Equifax, Experian and TransUnion.

Your personal credit report contains information about your financial background, including:

• the total number of credit accounts you have open, including mortgages, credit cards, automobile loans and other accounts;
• the amount you owe on each account, and the monthly payments you must make on each;
• the accounts that are properly paid;
• "delinquent" accounts (for which payments are past due, may negatively impact your credit score);
• "derogatory" accounts (those which negatively impact your credit score);
• and accounts that have been closed.

The report will show inquiries - when an organization such as a bank or retail store requests a copy of your report. It will also show public records - such as judgments, state or federal tax liens, and bankruptcies - and the total amount of money involved.

Your personal credit score is generated by a mathematical formula using information in your credit report. Credit scoring was first developed in 1958 by Fair Isaac Corporation to help predict whether a borrower will repay their loan on time. The resulting score is commonly called a FICO score, after Fair Isaac. Until recently, the scale ranged from 300 to 850. In March 2006, the major credit bureaus announced a new scale ranging from 501 to 990, with higher scores being most favorable, along with an A-through-F letter grading system to help consumers better understand their personal credit scores. For example, a score between 901 and 990 is an A, 801 to 900 is a B, etc.

When a credit bureau calculates your score, they do not take race, religion, age, sex or marital status into account. Neither does your income, occupation or employment history figure into the score, nor if you've been turned down for credit.

Review your credit report for accuracy, and immediately report any errors to the credit bureau or directly to your financial institution. The three major bureaus are required by law to provide a free personal credit report once a year at your request. They will also provide it for free under certain circumstances, such as if you were recently denied for credit, or if you suspect someone has been fraudulently using your account.

Credit scoring is predicated on five basic factors: your payment history; the level of outstanding debt; the length of your credit history; the number of inquiries on your report; and the types of credit present. By understanding your credit score, you can learn how improve on each of these factors and try to boost your personal credit score.

• Improve your payment history by paying all your bills consistently and on time. Carefully consider any offers from creditors to "reduce" or "skip" payments before accepting.
• Get current on delinquent accounts to reduce your outstanding debt and to avoid having delinquencies reported. Keep balances low on credit cards.
• Build on your credit history. The longer you've had credit, particularly if it's with the same credit issuers, the better for your credit score.
• Think twice before applying for new credit. Don't open accounts you don't need, as inquiries made on your credit report will lower your score.
• Diversify your credit. A large number of revolving credit accounts with open balances, for example, can result in a lower score than a combination of mortgage, installment and revolving credit balances.

A low credit score can translate into higher loan and credit card interest rates. But it can also inhibit your ability to secure insurance, school loans, rental housing, utilities, and even elective medical procedures.

If you have had credit problems in the past, you can work to repair your credit on your own or by using a credit counseling agency. Ask several agencies about services, fees and repayment plans before signing a contract. Beware of agencies that ask you to pay before services are provided, or that promise a quick fix, as it may take years to repair your credit legitimately.

If you find errors on your credit report, you should correct them as soon as possible to prevent any negative impact on your credit score. To dispute an error, you may contact the financial institution that reported the incorrect information to the credit agency or go directly to the credit agency. Provide all the necessary details in writing to explain the error. They will then have 30 days to investigate the error, submit any corrections needed to the credit agencies and provide you with a written response. Learn more about disputing information reported by TD Bank.

To protect your credit in the future, create a budget to help you reduce debt and pay your credit obligations on time, every time. When you do spend money, spend it wisely. Consider fees, interest rates, and whether you can afford the monthly payments before you obtain new credit. The sooner you begin to re-establish good credit, the sooner you'll improve your credit score.