Your Credit Score: Why It's Important

We all know it isn't a wise idea to let our health go for years without scheduling a physical exam. So why do we often ignore our financial well-being?

Checking your credit score is a quick and easy way to find out how you're doing. In the industry, your credit score is generally referred to as your FICO (Fair, Isaac and Company) score. Lenders use this to assess your credit worthiness. Typically, the higher your score, the lower risk you present. Usually, lenders will reward such applicants with a lower lending rate.

Because of this, keeping a close check on your credit score is important. It can alert you if you need to manage your credit more carefully, or if there is any false information that can mistakenly lower your score.

Under the Fair Credit Reporting Act, accurate information can stay on credit reports for up to seven years. But how can you ensure what's on there is indeed accurate? By performing a simple check-up.

In the past, credit bureaus and other companies would not share this information with consumers. But due to the passage of several recent laws, you can view your credit score for free. It's better to do this before you apply for a loan, giving you time to clear up any problems beforehand.

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Repairing Your Credit Score

So once you know your credit score, what then? If it's relatively high, you'll have a better idea what type of rate you should receive (and deserve) at lenders. Plus, it also offers peace of mind. Everyone likes to know everything is proceeding smoothly, and this is one way to make sure.

But what can you do to repair your credit if the information in your credit report is correct (but the score is less than perfect)? Don't worry. You have options.

A credit counselor can act as a mediator between you and your lenders.

Credit Reports: Things To Watch Out For

Be wary of any credit counseling company that makes promises that sound too good to be true. A sign that should raise a red flag includes paying for credit repair services before any credit counseling services are provided. Another to watch out for is suggesting you erase your old identity and start anew.

In reality, no one can instantly (and legally) remove accurate, but damaging information from a credit report. There are only two ways to ensure this happens: Either work out a payment plan that you can meet, or allow enough time to go by (usually this is seven years, but it can go up to ten years for reporting a bankruptcy).

Again, before you make a move, it's important to know your credit score first.

What is on my Credit Report?

What does your rap sheet say about you? It reveals how prompt you are in paying back loans, how much money you could borrow should you decide to go on a spending bender, and how many times you've applied for credit. What it does not reveal is your salary, business debts (unless you personally guaranteed a loan), and whether or not you're a generous tipper.

Your credit record also might not reflect all of your credit accounts -- such as travel, entertainment, gasoline card companies, and credit unions -- since some of these creditors do not supply information to the credit reporting agencies. Your deposit information, such as your saving's account kitty, are not part of your credit report. An individual credit report does not contain your FICO score, as calculated by Fair, Isaac.

Here's a rundown of what you'll see on your credit report from the big three consumer credit reporting agencies (Equifax, TransUnion, and Experian).

Identifying information

Obviously your name, address, phone number, and Social Security number appear on your credit report. But the report may also include a list of your current and previous employers, and even previous home addresses.

Your credit history

Your credit history is the centerpiece of your credit report. It includes a breakdown of your debt -- including:

• Late payments (30 days and longer)
• Outstanding debt (the amount owed, or size of payments for installment loans)
• The total amount of credit currently available to you (e.g., if you have a credit card with a credit limit of $8,000, even if you only use $1,000 or so of it a month)

These items will appear for all of your accounts (or institutions that have extended credit to you), including banks, credit card companies, mortgage lenders, auto-finance companies. These items will remain on your credit report for up to seven years.

Any public records

Public records include any filings of personal bankruptcy or court judgments against you. For example, if you do not pay your property taxes (tsk, tsk), your record will probably show that the local property tax board has filed a lien against you. These items remain on your credit report for seven years, except bankruptcies, which remain on your credit report for 10 years.

Inquiries into your credit

Whenever you or someone else (be it a bank, potential employer, etc.) checks your credit report, it shows up in your file as an "inquiry." There are two types of inquiries: hard and soft. Hard inquiries come mainly from lenders from whom you are seeking a loan. They look at your report to see what kind of credit risk you pose. If you're in good shape, and you get the loan, a hard inquiry will do no harm. If you apply for a bunch of credit at one time, however, prospective lenders may see that as a sign of desperation (or that you're going to try to make a run on the credit system).

If you are shopping rates for a mortgage, your report may reveal a cluster of hard inquiries. In the eyes of credit scorers (like FICO), this should not count against you, as long as you do your inquiries in a concentrated period of time (say, during a one-month period). When you are shopping around, ask the lender if they are going to make a hard inquiry to your credit report.

A soft inquiry will show up when you request a copy of your credit report, for instance. Soft inquiries do not stay on your credit report.

Getting the whole picture

Unfortunately, the three major credit bureaus don't always have the same information. Some lenders report information to just one or two of the credit bureaus. So for a truly accurate take on your credit situation, you'll have to get copies of your reports from all three bureaus, or order a 3-bureau credit report from one of the third-party vendors who gathers all the information. Your individual credit report also does not include your FICO (or other) credit score, which is a serious shortcoming since it's what lenders rely most heavily on when deciding whether to give you a loan. You'll have to pay an extra fee to get your credit score. Your overall credit score is based on all of the items that appear on your credit report. So if you want to raise your overall credit GPA, start with your credit report(s) and work from there.

In the end you decide if a single credit report is adequate for your sleuthing. And remember, if you want to raise your overall credit GPA, start with your credit report(s) and work from there.