If you’ve decided that 2014 is the year you’ll finally improve your credit score, you’re not alone. According to the U.S. government, paying off debt is one of the top New Year’s resolutions people make.
Before you begin getting out of debt and improving your creditworthiness, however, it’s important to first understand how your credit score works—and how the information on your credit report can impact your financial future.
As you kick off 2014 with creditworthy behavior, consider these eight things you may not know about your credit score:
1. The credit reporting agencies don’t determine your risk as a borrower, they only report your credit history and determine your score.
The three national credit reporting agencies—Equifax, Experian, and TransUnion—do not determine whether you qualify for credit or what terms and interest rates you are offered.
Instead, the agencies collect and maintain a history of your credit activity, which is reported to them by lenders and creditors that have granted you credit in the past or with whom you still have open accounts. Each of your creditors, including credit card companies retailers, lenders, blanks, and collection agencies, reports the status of your accounts and your payment history. Information is also collected from public records.
A history of on-time payments will reflect positively on your credit score, while a history of late or missed payments could negatively impact your score.
2. There are different types of credit scores.
You don’t have one credit score—you have several. There are various credit scoring models that lenders use to predict your credit risk, and each lender picks the model that best fits its needs. Some lenders use scores that are weighted according to their industry, while others use blended scores from all three credit reporting agencies.
As a result, your auto lender might calculate a credit score that is different from the credit score calculated by your mortgage lender. But if you have a good credit score with one scoring model, it’s likely (but not guaranteed) that you’ll have a good score when other models are applied.
3. If your credit scores are different among the credit reporting agencies, it might not be a mistake.
If you order your credit score from each of the three national credit reporting agencies, you could find some variance between the three scores.
For example, if you order your credit score from one agency in January and then pull your score from another agency in April, your scores could be different because of changes made to your accounts or new accounts that have been opened in those months.
In addition, not all creditors report their data to all three credit reporting agencies—some only report to one agency, while others report to all three. As a result, your credit report from each agency might have slightly different data.
Finally, each credit reporting agency uses different scoring models. Even if each agency has information from the same creditors, the model the agency uses could still generate different scores.
But if inaccuracies in your credit report are causing discrepancies between your credit scores, you may want to file a dispute with the agency reporting the erroneous information. Inaccurate information in your credit report could also be a red flag for identity theft.
4. Your age and marital status, along with other pieces of personal information, are not used to calculate your credit score.
Your credit score is calculated based on the information in your credit report, such as your payment history, your debt-to-credit ratio, and the length of your credit history.
There are certain pieces of personal information that are not factored into your credit score and cannot be considered by lenders when evaluating your application. This information includes your age, marital status, race, religion, and gender. Generally, your salary, occupation, employer, and employment history are also not considered.
5. Closed accounts can still affect your credit score.
Just because you close an account doesn’t mean that information is erased from your credit report.
If you close a credit account that was paid as agreed, it will generally stay on your credit report for up to 10 years from the date of last activity. If you close an account that was not paid as agreed and charged off, on the other hand, it will typically stay on your credit report for seven years plus 180 days from the start of the delinquency that led to the charge off.
6. The Fair Credit Reporting Act (FCRA) limits who can see your credit report.
Not just anyone can access your credit report.
Businesses must have a “permissible purpose,” as defined by the FCRA, in order to access your credit report. Otherwise, third parties must have your written permission in order to obtain it.
According to the FCRA, those who can access your credit report include:
- Credit grantors with whom you have applied for credit
- Collection agencies—when they need it to collect a debt
- Insurance companies, which may use it for underwriting
- Employers—but only with your written permission
If a company pulls a copy of your credit report, it will be listed under the inquiries section of your report.
7. Your credit report is free through annualcreditreport.com, but you need to pay for your credit score.
You are entitled to one free credit report from each of the three national credit reporting agencies every 12 months through annualcreditreport.com. You could order all three reports at the same time in order to compare them, or you could scatter your order requests to monitor your credit report every few months.
In order to access your credit score, you’ll need to pay a nominal fee. Prices can vary slightly depending on the agency from which you pull your score.
8. Checking your own credit report will not hurt your credit score.
When you order a copy of your credit report, you trigger what’s known as a soft inquiry. Soft inquiries are also made when a credit card company offers you a preapproved credit card for which you did not apply. In both of these cases, the inquiry does not impact your credit score.
Hard inquiries, on the other hand, do impact your credit score. A hard inquiry is triggered when a creditor with whom you have applied for credit pulls a copy of your credit report.
In general, inquiries will stay on your credit report for two years, with only the hard inquiries factoring into your credit score.