One of the most complicated aspects of our credit histories is understanding how they work, why each credit bureau is different in its scoring formulas and why we’re approved for a $30,000 automobile but are declined for a department store credit card with a $300 credit limit. Keep reading as we try to wade through the confusion and provide insight that can help consumers as they seek to better understand the specifics of the three credit bureaus role in their lives.
One of the most common questions we receive is why our scores vary from one credit bureau to another. Even when a score is pulled at the same time, they can vary. We went straight to Experian for the answer. Here’s what one of the three biggest bureaus tells us:
The three major credit reporting agencies use their own formulas – all of which are proprietary information – to formulate a credit score for a consumer. Because the algorithms vary, it’s natural that the scores will differ – and even by fifty, sixty or more points. Generally, a creditor will take all three scores and by using its own formula, determine if an applicant will gain approval or if it will decline the credit application on a host of those factors.
Also, because there are no specific guidelines on how often or when credit reports are updated by each credit bureau, that can also present varying scores. One bureau may update scores during the first two weeks of the month while another waits until the third or fourth week of the month.
Another question we’re often asked is if a consumer needs a credit card to improve his credit score. The short answer is no. But the more detailed answer explains why so many financial experts encourage consumers to incorporate a credit card in his efforts of improving his credit scores. A secured credit card is a great choice since it shows each and every month additional insight into how you make independent credit management decisions. Credit card companies report your spending and payment habits on a consistent monthly to the three bureaus.
That said, a good credit history can be built with installment loans, too. Things like small personal loans or automobile loans also show creditors your commitment to on time payments. A credit card is often encouraged since installment loans might be more difficult to secure, but a credit card – or a secured credit card – is often easier for consumers. Once the patterns begin emerging, it’s much easier to secure bank or automobile loans.
There are those who wonder if they can “cancel” out an automobile repossession if they simply pay the balance off. That’s not an option, since the repossession was legitimately placed on your credit file; however, your commitment to pay the loan anyway will also show. The zero balance will also be disclosed in a credit report. Consumers should expect a repossession to remain on their credit histories for about seven years – though in some states, it can continue to be reflected for up to ten years.
Have you recently paid off a collection account with the hopes that it will disappear from your credit report? Odds are you’re disappointed when you’re told that the collection will remain on your report for at least seven years. The only change you’re likely to see on the account – until it ultimately cycles out – is your payment in full. If this was an account you faithfully paid for several years and then were laid off or had some other unplanned event in your life, you can request the three bureaus to place a note on your account with the explanation. This may or may not affect a future creditor’s decision, and it’s more likely your commitment to pay it off – even if it did ultimately become a collection account – will weigh heavier than your letter.
Also, even if there was some magic cure to erase past credit mistakes, lenders would only be seeing part of the picture that defines your history and it’s a credit history that lets a lender know you’ve been responsible for so many years. A bad mark that’s been corrected shows good credit management despite the trip ups. It can also reveal you’ve pulled through tough financial challenges.
Finally, we’re asked on occasion whether debt management companies are capable of making real changes on a consumer’s credit report. There are many debt management companies that are happy to assist consumers as they seek to find their way back from tough financial times. But a debt management company is not necessary. Many aren’t even aware that they can undertake these efforts on their own. You can just as easily negotiate lower interest rates or temporary payment options when you’re going through a tough financial crisis.
Keep reading as we continue to answer our readers questions from time to time.
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