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It’s never too late to start building or improving your credit. Whether you have good credit, are looking for ways to improve it, or have no idea what a credit report is, understanding your score and how it’s used is essential to developing financial health. Here are some questions and answers to get you started.

Q. What’s a credit report?

Answer: A credit report is a compilation of your history with financial accounts, credit cards, and loans, as well as your bill-payment patterns. These factors are weighted in the following order of importance:

  • Timeliness of bill payment
  • Dollar amounts owed
  • Length of credit history
  • Variety in type of accounts
  • Number of recently opened credit accounts (including student loans)

Susan Bruno, a member of the American Institute of Certified Public Accountants’ National CPA Financial Literacy Commission, explains that the information in your credit report can directly affect your eligibility for different types of loans and on what terms (such as interest rate).

Your credit may be checked in any of these situations:

  • Buying a car or other big purchases
  • Applying for a credit card
  • Buying or renting a home
  • Getting a job

Q. How do I get my credit report, and how much does it cost?

Answer: Over half of the respondents to a recent Student Health 101 survey said they’ve requested their credit report.

You’re entitled to get your report from each of the three major credit-reporting agencies once a year, free of charge: Equifax, Experian, and TransUnion.

Learn more about these agencies

The Big Three (Credit-Reporting Agencies)

There are three main agencies that provide credit reports to lenders. You are entitled to free copies of your report—from from each of them&madsh;annually.

The agencies are:

EQUIFAX
800-685-1111

EXPERIAN
888-397-3742

TRANSUNION
877-322-8228

These three companies have also teamed up to create AnnualCreditReport.com, a central source for retrieving all your free reports at one time. This Web site and its services are endorsed by the U.S. Consumer Financial Protection Bureau, which explains, “By requesting the reports at the same time, you can determine whether any of your files have errors. By requesting the reports separately, you can monitor your credit files more frequently throughout the year.”

More information.

Bruno recommends checking your credit report at least annually to see what’s being reported to creditors, and more importantly, to ensure that everything is accurate. “It’s not uncommon to find errors that require follow-up to resolve. Make sure you leave enough time to do this before a third party checks your credit,” she recommends.

One thing to note is that the free reports don’t indicate your credit score. There are many companies offering reports that do, including those listed above. Gail Cunningham, spokesperson for the National Foundation for Credit Counseling in Washington, D.C., suggests purchasing a report that contains your credit score, as that number can influence a lender’s decision to grant you credit. “It’s some of the best money you’ll spend,” she adds. But be cautious of services that may lure you in for a small fee and then enroll you in a subscription-based credit monitoring service (and charge you monthly). By law, companies can charge no more than $11.50 per report.

Q. How do I read a credit report?

Answer: In order to check for accuracy, carefully examine the following sections:

  • Name, birth date, addresses, and employers
  • History of banking and credit accounts, including historical balances and delinquencies
  • Collection activity
  • Inquiries (requests for the report)

Q. What’s “good” credit?

Answer: You don’t have to make a lot of money in order to have good credit. That’s because income isn’t included as part of your credit score.

You may have heard, however, that it’s good to have at least one credit card (and pay it in full each month) in order to build a credit history. Cunningham explains, “Generally speaking, an individual needs three open and active accounts to provide enough data for the credit-scoring model to calculate a score. A credit score is important because those three little numbers play a large part in whether or not a person will be granted credit.”

A score of 720 or more is considered good and a score below 600 is considered poor. In general, the higher the number, the lower a risk you are to the lender.

Q. How can I build credit?

Answer: You can build credit and improve your score by:

  • Paying bills on time
  • Having different types of credit resources
  • Maintaining a long track record with current creditors
  • Using less credit than you’re allotted

Cecily R., a graduate student at the University of Southern California in Los Angeles, suggests, “Be sure to pay bills on time, including loan payments. Use multiple credit cards, and pay them off each month in full.”

There are also options if you have little or no credit. Matthew B., a graduate student at Walsh University in North Canton, Ohio, offers this advice: “The most inexpensive way to establish your credit is to open a new credit card and buy one small thing every month and pay it off on time.”

Q: How long does it take to improve my score?

Answer: Information stays on your credit report for 7-10 years, including data about late payments and nonpayment. But you can start to rebuild your credit almost immediately by making on-time payments starting right now.

Your credit report is one indicator of your financial health. Just like other elements of wellness, gathering information and making conscientious decisions will help you reach your goals.

Take Action:

  • Get your free credit report at least annually from each of the three major credit-reporting agencies.
  • Review the reports carefully and dispute erroneous information.
  • Maintain a consistent credit history of on-time payments.
  • Be conscientious about opening new lines of credit and applying for loans.

Information about handling mistakes on your report

How to Handle Errors

Q. What if there’s a mistake on my credit report?
A. The most common credit report errors are in the following areas:

  • Number of active accounts
  • New accounts or those with non-zero balances
  • Length of credit history
  • Total outstanding balances
  • Number of accounts currently overdue

If you find an inaccuracy, write a letter of dispute to all three credit-reporting agencies. Transmitting information to them is voluntary on the part of creditors, so the reports might say different things.

If you’re in the process of clearing up a discrepancy, or if you’ve been the victim of fraud, you have the right to include a 100-word statement on your credit report explaining the situation. The statement lasts for two years. You can also request that updated information be sent to anyone who requested your report in the previous six months.

Here are more things you can do:

  • Contact the lender, employer, or other source of the erroneous information directly. Ask them to correct their records and update what they’ve reported to the credit-reporting agencies.
  • If you’re in the process of applying for a loan, let the lender know directly that you’re in the process of disputing something in your credit report.
  • Follow up to make sure the problem has been fixed. If you report an error, the agency must investigate and respond within 30 days.
  • Make sure to review everything at least annually and pay special attention to any problematic areas from the past.

Information on how your credit is evaluated

Credit Scoring

The most widely used scoring system used by lenders is that of Fair Isaac Corporation, or FICO®. According to Dr. Douglas Smith, a professor and director of the Center for Business and Industrial Studies at the University of Missouri in St. Louis, FICO tells potential lenders how likely it is that you would default on payment in the six-month period after receiving a loan. Although late payments and delinquencies on your credit can’t be wiped off your report, most negative information must be removed within 7-10 years, by law.

More Q&A about credit reports

More Credit Score Q&A

Q: Will repetitively checking my credit report harm my credit? I don’t want it to look suspicious.
A: You can check your credit report as an “administrative” query without hurting your credit score. But potential lenders also request reports each time you open a credit card or apply for a loan. Many inquiries made by potential lenders over a year’s time can lower your score.

Q: Will closing a credit card affect my score?
A: Yes and no. If you’re having difficulty paying your bills on time, it’s probably best to close the account. Ask the credit company to make note that it’s being closed at your request. Also make sure that’s reflected in your credit report.

On the other hand, the length of your credit history does account for about 15 percent of your entire credit score. You may want to keep open the credit card with which you have the longest and best on-time payment history.

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Amanda Holst is a recent graduate of at San Jose State University in California, where she majored in journalism and nutrition.