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A study conducted by the Federal Trade Commission (FTC) found that 1 in 5 people have an error on at least one of their credit reports. While that may not seem like a big deal, errors on your report can lower your credit score, hindering your ability to qualify for credit or making the terms of your credit more expensive.
Your score from a lender’s viewpoint
To understand how much credit report errors can cost you, it helps to understand how lenders view your report. When you pay bills each month, most lenders report the payment to one of the big three credit reporting agencies — Equifax, Experian, or TransUnion. Anyone with a credit history has three reports, one from each agency.
Any time you apply for credit, most lenders look at what’s called your “FICO® Score.” The FICO® Score was invented in 1989 by Fair Isaac Corporation, designed to help lenders make decisions about borrowers quickly and easily.
Because of the FICO® Score, lenders don’t have to comb through your entire credit history. Instead, they can look at the three-digit number associated with your report and get an idea of how well you’ve managed debt in the past. Scores range from a low of 300 to a high of 850. The higher your score, the better it appears you deal with debt.
Think of it as a monthly report card. If you make a payment in full and on time, your grade goes up. If your payment is late or missed, your grade goes down.
Scores = Ratings
| Rating | FICO® Score Ranges |
|---|---|
| Exceptional | 800-850 |
| Very Good | 740-799 |
| Good | 670-739 |
| Fair | 580-669 |
| Poor | 300-579 |
As the table indicates, the lower the score, the higher the perceived risk. What does this mean to you in real life terms? If you qualify for a loan, the interest rate is likely to be higher to make up for the extra risk a lender feels it’s taking. The best terms are typically reserved for borrowers with the highest credit scores.
The tricky bit
You don’t always know which of the three major credit reporting agencies a creditor reports to. For example, your mortgage company may report to all three, while a credit card company may report to only one or two of them. The only way to ensure the highest score possible is to pay all bills in full and on time, so no matter where a report is made, your score is protected.
Incidentally, you never know which credit reporting agency a creditor will pull your report from either. Let’s say you visit your local credit union to apply for an auto loan. Each creditor decides which agency it wants to use. Again, the trick is to protect your credit score across the board.
Check your reports
Federal law allows you to request one free copy of each credit report annually. It’s easy to do through a site like annualcreditreport.com. In fact, due to the current economic challenges facing Americans, the three credit bureaus are providing a free credit report weekly to those who request them.
Once you receive a copy of the three reports, go over each with a fine-toothed comb, looking for anything that is incorrect. Mistakes may seem inconsequential, but every error matters. For example, if your name is spelled incorrectly on a credit report, make a note of it. If a loan you’ve already paid off shows up on your credit report as still being active, circle it. No matter how minor an error you find, it’s worth disputing.
