It has never been more important to have good credit. Lenders are being pickier than ever about giving loans to borrowers, and even if you aren't in the market for a home or car loan, insurance companies and even prospective employers often use credit reports to set rates and make hiring decisions.
Unfortunately, understanding your credit report and the credit scores that various ratings agencies provide can be extraordinarily difficult. All too often, credit reports and scores are based on erroneous information, but it can be intimidating to try to go up against big credit-rating bureaus to get those errors fixed.
You're Not Alone
Now, though, you have a friend in your corner. The Consumer Financial Protection Bureau recently announced that in September, it will start supervising the credit reporting companies that collect and provide information about your credit.
As CFPB Director Richard Cordray said earlier this month, "[T]he credit reporting market is not one where consumers can shop around among different providers, for people have no choice about whether to have any of the credit reporting companies keep track of their credit history. That is why the Consumer Bureau's new authority is so important."
One surprising thing about credit reporting companies is that there are a huge number of them. Although most people are familiar with the FICO score from Fair Isaac (FICO) as well as major credit reporting agencies Experian, Equifax (EFX), and TransUnion, the CFPB cites about 400 different agencies that collect credit information. Many of those are what the CFPB calls "specialty reporting companies" that aim at collecting information that's pertinent to specific industries, such as tenant background information for landlords.
The CFPB plans to oversee only about 30 of these agencies, but together, they bring in about 94% of the industry's total revenue. That should give you a lot of protection if you have trouble with any of the big reporting agencies.
Little Error, Big Impact
Dealing With Your Credit Report Just Got a Lot Easier
Credit card sign-on bonuses are certainly enticing, but you shouldn't be signing up for every card that's offering some cash back. This is because each application and subsequent credit pull will generate a hard inquiry that will appear on your creditreport. (Credit pulls that aren't used to decide whether you are actually getting a loan – for instance, one conducted by a landlord or by a bank when you are looking to get a checking account – are considered soft inquiries and will have no impact on your score.)
Each hard credit card inquiry will cost your score between three and five points and stays on your report for two years, though they only negatively impact your score for about half the time they appear.
One missed payment may seem innocuous enough, but in reality a single delinquency can cost a previously stellar credit score to fall more than 100 points. The good news: As long as the missed payment doesn't lead to additional woes, your score will start to rebound relatively quickly and it can get back to good standing in about 12 months following the delinquency.
You should think twice before officially closing that credit card you opened back in college, especially if you're getting ready to apply for a new line of credit. Closing an old account can have a negative impact on yourcreditscore since it can lower your credit-to-debt utilization ratio, which is essentially how much credit you have at your disposal versus how much credit you are actually using.
The exact effect this has on your score will vary, depending on the rest of yourcredit profile, but the advice is consistent.
"If there is no annual fee, just charge something small every now and then," says Adrian Nazari, CEO of Credit Sesame. This will keep the issuer from deciding to close the account for you.
As MainStreet has previously reported, it's never a good idea to bump up against your overall creditlimit because your credit utilization ratio will appear sky-high. However, according to Chris Mettler, founder of CompareCards.com, maxing out a single card can negatively influence your credit score as well. (Again, the exact impact would depend on the rest of your creditprofile.) As such, if you do have a particular card that's bumping up against its limit, you'll want to pay that down as soon as possible.
"You don't want your balance due to be over 33% of the availablecredit line," Mettler says.
Credit card issuers typically only report two things to creditbureaus each month: whether you're up-to-date on all your payments and what your balance at the time is. As such, running up big purchases right before your statement closes – and the issuer reports the information – can negatively impact your credit-to-debt utilization ratio and subsequent score, regardless of whether you go on to pay off that balance on time or not.
"The trick is to make sure your balance is low before it is reported," Nazari says. This is why it can be a good idea to pay off purchases as you make them or prior to the end date of your billing cycle.
Even if you're not particularly credit active, it's a good idea to take advantage of the free annual credit report the Fair Credit Reporting Act entitles you to, if only to scour it for incorrectly attributed delinquencies, accounts or inaccurate balances, which can all do varying amounts of damage to your score. This is because errors on credit reports are all too common. As MainStreet has previously reported, about 30% to 40% of all credit reports have some type of error on them, some of which can unfortunately be difficult (and time-consuming) to remove.
You may think that you don't owe that unpaid medical bill that keeps getting sent to your house, but your score is still in jeopardy if you decide not to pay it. Many places that don't lend money, like a hospital or cable company, will send their unpaid bills to a collections agency after a certain amount of time and they will report you to the credit bureaus. Similar to a missed mortgage, credit card or auto loan payment, this delinquency can cost good scores 100 points or more.
"Whether you are right or wrong, [the bill] will negatively impact your score," Mettler says. As such, consumers may want to shore up the bill in an effort to spare their score or dispute the bill through proper channels to get it eradicated.
For its part, the industry seems prepared for greater regulation. As Consumer Data Industry Association President Stuart Pratt told NBC News, "The consumer reporting industry looks forward to working with the CFPB in its regulatory oversight activities."
Nevertheless, Pratt challenges allegations that the consumer dispute process is flawed, pointing to a study that found that 95% of consumers had a satisfactory experience with their disputes.