Credit Report vs. Credit Score

All this credit stuff can get pretty complicated in a hurry.

But two things you should have a handle on are credit reports and credit scores. Each are important in their own right, and both are necessary to assess your overall standing as a borrower.

While the pair certainly overlap, they are two entirely different things.

Credit Reports

A credit report contains a wealth of information about you, including basics like your name, address, social security number, and employment history.

Additionally, your credit report will detail your credit history, with information on the types of accounts you’ve got open, how long they’ve been established, what their associated balances are, and if they’re current or derogatory (collections, charge-offs).

Any recent credit inquiries will also show up on a credit report so creditors can determine if you’ve been shopping around for new credit. This can alert them if you’ve recently gone “credit crazy,” which can boost your chances of default.

And while all this information can be very helpful to both consumers and creditors looking to determine creditworthiness, both parties seem to be most interested in credit scores.

Credit Scores

A credit score is simply a three-digit number between 300-850 (credit score range) for Fico scores, and a number between 501-990 for VantageScore. It’s a numerical representation of your credit default risk, based on the aforementioned information found in your credit report.

Think of it this way.  A credit score is your “grade” based on what’s found in your credit report.  Similar to a paper you would write in school, you are assigned a grade.  And often people are more concerned with that grade than what’s behind it.

So if you’ve got a lot of good information on your credit report, your associated credit score should be high to reflect that. The opposite is also true. If there’s lots of bad stuff in your credit report, your credit score will be poor to reflect that.

Generally, a fully loaded credit report will contain three credit scores, one for each of the main credit bureaus. These credit scores are derived from the information found in your credit report.

Without all that information, you wouldn’t have a credit score, so the two can’t really exist without one other. In fact, those who do not have credit scores don’t have sufficient credit history on their credit report to generate a credit score.

Tip: If you order a free credit report from the official AnnualCreditReport.com, don’t expect to receive a credit score. They are not included, and can only be purchased for an additional fee, typically to the tune of $10 or more per score. Expect to get numerous offers to purchase your credit score for an additional fee after you pull your credit report…

If you want a free credit score, consider enrolling in a trial credit monitoring program and canceling before incurring any charges. This is the best way to get your credit scores without paying a dime.

Just remember that you need both your credit report and credit scores to properly assess your creditworthiness.

How Many Credit Inquiries Is Too Many?

Credit Q&A: “How many credit inquiries is too many?”

Though most credit score questions are hard to nail down, thanks in part to the cryptic nature of credit scoring, we can get some useful hints if we look at certain data.

Do the Credit Inquiries Matter?

First things first, there are two types of credit inquiries. Hard and soft.

Hard credit inquiries involve applications for new credit, so they can lower your credit score, as new credit presents new default risks.

Soft credit inquiries, on the other hand, don’t involve requests for new credit, and thus have no adverse effect on your credit score (Does a credit check lower your credit score?).

While there is not a set number of credit inquiries that you should aim to stay below, it’s generally best to keep hard credit inquiries to a minimum to ensure your credit score is not negatively impacted in any way.

I recently did a Credit Karma review, which happened to come with a wealth of insights on credit scoring, one having to do with credit inquiries.

Check out this chart, which compares all users and their average number of hard inquiries over the past two years:

inquiries

You’ll notice that most consumers were in 1-2 credit inquiries range, though a large chunk of consumers had over 10!

Now take a look at this chart, which shows the average credit score based on the number of hard inquiries:

scoring

More Credit Inquiries = Lower Credit Score

As you can see, those with zero hard credit inquiries had the highest credit scores, followed by those with 1-2, and on down the line. Amazing correlation. In fact, it’s 100% correlated, which is pretty rare to see in any data set.

So I think it’s safe to say that the fewer hard credit inquiries you have, the higher your credit score will be, though new credit is still a relatively weak determinant compared to other factors like on-time payments.

So it’s unclear if this is just coincidental, or indicative of other credit habits.  In other words, perhaps those who apply for new credit sparingly also tend to make on-time payments, while those who apply for new credit constantly also fall behind on their existing obligations.

Questions like these illustrate how complicated the credit scoring game is to nail down. But credit scores aside, you shouldn’t apply for too much credit anyways. It could land you in hot water at some point down the road if you manage to overextend yourself.

Read more: How a Fico score is determined.

(photo: teosaurio)

Credit Karma Review: Not a Scam and Pretty Accurate Too!

Below is my Credit Karma review, which is my personal experience with the company’s credit scoring tools.

So I decided to give Credit Karma a whirl, considering they proclaim to be the providers of absolutely free credit scores and credit reports without the need for a credit card. They even highlight that fact in their TV commercials.

To sign up, you simply need to come up with a screen name and password, and then fill in some basic information, including address, phone number, and social security number.

account

Don’t worry, your social won’t be stored in their database, it’s only used to retrieve your first credit score. So yes, Credit Karma is perfectly safe to use.

You also have the option of providing your annual household income, which Credit Karma claims will help you receive a “more tailored report and savings data.” Not sure about that one, but it’s up to you what you want to provide.

Credit Karma’s Free Credit Scores

After inputting the information and agreeing to the terms, Credit Karma generates a credit score instantly. Yep, it’s really free! Phew.

They said mine came from TransUnion, one of the three main credit bureaus.  My current credit score is 811, which is considered “excellent,” ranking in the 91% percentile nationwide.  Not too shabby.

As you can see from the graph below, they also provide you with your full credit score history (which I believe dates back to when you first opened a Credit Karma account).

And they show you when your credit score was last updated, along with when it’s due to get another update.  It appears to be weekly.

Update: Credit Karma now provides two free credit scores, one from TransUnion and one from Equifax, both based on VantageScore 3.0.

two scores

They also provide a little credit score range, in which I was in the second to highest credit scoring tier (I’m a little disappointed).  Still, lenders view my credit as very good, so it shouldn’t really matter other than my bruised ego.

range

Note: Credit Karma uses a different credit scoring formula than the ones you might actually pay for via the credit bureaus or receive from lenders (FICO), and it could vary widely depending on what is and isn’t reported (and how and when it is reported).

Credit Karma’s Credit Report Card

Credit Karma has a “credit report card” as well, which is a quasi-credit report with information such as credit card utilization, percent of on-time payments, average age of open credit lines, total accounts, total number of hard credit inquiries, and total debt.

Additionally, it compares to you to other users on Credit Karma to see where you stand, with metrics for age, state, and even the e-mail address your provided (Yahoo, Gmail, etc).

compare

Finally, Credit Karma provides a credit score simulator to determine where your credit score might stand if you performed certain actions (similar to the FICO score simulator).

All in all, a useful tool to see where you stand credit-wise without having to deal with one of those free trials.

Despite it being a dumbed-down credit report, it’ll probably catch any red flags you may not be aware of, which would likely prompt you to order a full credit report or monitoring program so you could take necessary action, like credit report disputes and so forth.

Is Credit Karma a Scam?

Whenever a new, “free” product is released to the general public, people automatically assume it’s got to be a “scam.”  After all, nothing comes without a price, right?

Personally, I don’t think Credit Karma is a scam, though they’ve certainly got a business model in place that benefits them in the event that you apply for a new line of credit (they may earn a commission).

That’s right, Credit Karma is advertiser supported, so you will receive offers from banks and credit card issuers if you sign up for the service. And Credit Karma may even “recommend” that you open a certain line of credit, such as a 0% APR credit card, or refinance your mortgage to save money. Just be sure to opt-out to avoid being bombarded.

In short, they can justify soliciting these offers because it’s their way of “helping you” improve your credit score and/or save money. So it’s certainly not a scam, but one could call it a little “gray.”

They actually recommended that I refinance my credit card debt (which I pay off in full each month) with a new personal loan, which makes absolutely no sense. So be warned!  Some might consider such bad advice to be a scam.

Is Credit Karma Accurate?

This is tough to answer.  For example, I recently applied for and got approved for the Chase Ink card and it’s awesome 60,000 bonus points.  But Credit Karma doesn’t show the credit card in my account, so the accuracy of my just updated credit score may be in question.

However, Credit Karma does give you the ability to connect accounts such as credit cards that aren’t yet listed.  Perhaps this will speed up the process and lead to better accuracy in the future.

Additionally, the credit score provided by Credit Karma is not a FICO score, so it will differ from your true FICO.  How much it will actually vary will depend on how much recent activity you’ve had.

If you don’t use your credit cards very often, or open new accounts all that much, accuracy should be pretty high.  Conversely, if you’re constantly opening and closing accounts, and/or charging up big balances and paying them off, you may see bigger data lags and inaccuracies as Credit Karma processes the new information.

In other words, you might need to be patient, or just accept the fact that your credit score may be a little out-of-date, even if constantly updated.

For the record, I’ve currently got a 793 FICO score on my Discover it statement, a 766 score with Credit Karma, and a 743 credit score with Credit Sesame.  I don’t ever expect these to line up perfectly.  But they’re all in range so I’m not too bothered.

*If you want to see all 3 of your actual credit scores and related credit history, you must order a tri-merge credit report. But Credit Karma’s free credit score seems to be a fairly accurate representation, making it a good start for someone interested in knowing a little bit more about where they stand.

Google’s Investment in Credit Karma

In March 2014, Google Capital made a sizable investment in Credit Karma. The search provider led an $85 million investment round in the company.

Along with the monetary investment, Google Capital Partner David Lawee will join Credit Karma’s board of directors.

And if all goes well, I wouldn’t be surprised if we see Credit Karma being publicly traded in the not-too-distant future.

The move should also strengthen the Credit Karma brand, and make it a more trustworthy destination for consumers looking to view personal financial data in a safe environment.

(photo: svadilfari)

How to Pay Off Credit Card Debt

Credit card Q&A: “How to pay off credit card debt?”

So it looks like you got approved for a credit card, and spent your fair share. Congratulations, you’ve learned a valuable financial lesson. Never spend more than you can afford.

Okay, I’ll spare you the lecture and get to the solution. If you’ve got a lot of credit card debt, you first need to stop the bleeding.

[Should you pay off your credit card in full?]

Stop Spending Immediately

By stop spending, I mean stop spending excessively.  Obviously, in order to live, you need to spend money. So continue buying what you need. Just stop buying what you don’t. Period.

You may want to shift your spending from credit cards to your debit card, or even to cash. At least until you get a handle on things.

If you want to get out of debt, the last thing you want to do is pile on more. So you may have to grab a pair of scissors and cut up a credit card or two. You don’t need to close the account, just eliminate the potential for new purchases.

Once you’ve done that, you need to assess the quickest and cheapest way out of the debt.

Balance Transfers Are the #1 Debt Buster

There are several ways to pay off credit card debt, but perhaps the best method is to transfer existing balances to low interest credit cards, or even better, a 0% APR credit card.

By doing so, you’ll be able to lower the APR tied to the balance(s), which will result in fewer finance charges.

Long story short, you want to lower your credit card’s interest rate as soon as possible.

Let’s look at an example:
Current credit card debt: $6,000
Current credit card APR: 19.99%
Monthly finance charges: $99.95

[How to calculate credit card interest.]

Instead of paying nearly $100 a month in finance charges, you can ask your credit card issuer(s) to lower your APR.

Essentially, you’ll threaten to move the debt to another card issuer if they don’t play ball. This is one solution, but probably won’t result in anything more than slightly lower APR, not 0% APR.

Sure, an interest rate of 10% beats 20% by a mile, but it still means your existing debt is breeding interest each and every month. You need to put an end to it so your entire credit card payment goes toward knocking down the balance.

You Need 0% APR!

Enter the 0% APR balance transfer credit card, which will allow you to pay nothing in the way of interest during the promotional period.

At the moment, many credit card issuers are offering 0% APR for between 15 and 18 months, plenty of time to pay off the credit card debt and get back on your feet.

Using our example above, if you made monthly payments of $400 for 15 months, you’d be completely out of debt without paying a penny of interest.

Even if you couldn’t make payments that big, paying down as much of the balance as possible during the 0% APR period would save you a considerable amount of money.

The only downside to a balance transfer is the associated fee (unless you can find a no fee balance transfer credit card), but it still beats paying interest every month.

This is pretty much the be all and end all way to get out of credit card debt.

You can look into debt consolidation companies and credit counselors as well, but I’m personally not a fan. A lot of them seem to cause more harm than good, such as credit score dings and hefty fees.

Read more: Which credit card to pay off first?

More than a Quarter of Americans Have Credit Scores Below 600

A staggering 25.5 percent of American consumers now have credit scores of 599 or below (bad credit score), according to statistics provided by Fico Inc., the founder of the Fico score.

That’s nearly 43.4 million Americans with subprime credit scores, meaning many can’t qualify for most mortgages or even auto leases, let alone get approved for a good credit card.

The data, based on consumer credit reports from April, revealed that 2.4 million more consumers have fallen into the lowest credit score categories in the past two years, based on Fico’s credit score range of 300-850.

Historically, just 15 percent, or 25.5 million of the 170 million Americans with active credit accounts have had credit scores below 599.

The share of those with moderate credit, between 650 and 699, is around 12 percent, below its historical average of 15 percent.

It’s a sign of the times, as days of easy credit have caught up with consumers, who now have no choice but to pay down credit balances or risk default.

Luckily that’s a bit easier thanks to the new credit card rules, which make anything more than the minimum payment actually go toward the highest APR balances.

A few years ago, it was easy to shift debt from one credit card to the next via balance transfers, or serially refinance using questionable mortgage programs that allowed homeowners to defer interest.

The big question is whether Fico will ease its scoring algorithm to reflect the tough economic times, or if banks and lenders will lower credit score requirements so more consumers are able to qualify for loans.

On the flip side, the share of consumers with credit scores of 800 or above (what I consider an excellent credit score) has risen from from its historic 13 percent average to nearly 18 percent over the past few years.

The FICO Score Simulator

I recently took a closer look at the so-called “FICO Score Simulator” offered up by FICO, founder of the all-knowing and all-powerful Fico score.

The tool essentially allows consumers to determine which actions will improve their credit score the most, instead of simply guessing.

You can gain access to the FICO Score Simulator if you purchase your credit report from the company, to the tune of $19.95. But they offer a sample to give us some insight.

Their sample had a base FICO score of 707, which I consider the lower end of “good credit” in my credit score range.

But suppose you needed that score to be higher to qualify for a mortgage or obtain auto loan financing.

Well, the FICO Score Simulator says your best course of action would be to pay down delinquent credit card balances immediately to raise your credit score to between 727-747.

improvement

This action would help you in two ways – you’d have lower credit utilization and your account would be back to “paid as agreed,” which is surely better than being delinquent.

And if you continue to pay down balances and make on-time payments, your FICO score will increase even more over time.  This will also bolster your credit history, as time is an important ingredient of “trust” as well.

The simulation said simply paying bills on time for just one month would push your score to between 707-727, not bad for just doing exactly what you should be doing.

FICO also noted that certain actions can sometimes help, but also hurt your credit score, including applying for a new credit card and executing a balance transfer.

balance transfer

The new credit card could drop your FICO score to between 697-717, while the balance transfer would leave you somewhere between 692-722. The impact isn’t sizable here, but you can see where opening multiple new accounts in a short period of time could take its toll on your credit score.

And you certainly wouldn’t want to execute a balance transfer or open a new credit card before applying for a more important line of credit, such as an auto loan or a mortgage because those few points might matter.

The takeaway here is to only apply for new credit if and when needed, not recklessly to snag rewards points and cash back. There are better ways to “make money” folks.

Finally, maxing out your credit cards could push your FICO score as low as 637, while missed payments on those accounts could drop you into the high 500 range.

missed

All of these simulations give us a window into the minds of the scientists at FICO, but still leave plenty of margin of error. No two credit profiles are alike (just like snowflakes and fingerprints), and thus the impact of one action will never be the same for two different consumers. This tool is merely a guide.

And it’s not a substitute for obtaining your actual score. If you’re looking for even more, check out the FICO score estimator, which is a free tool that offers a more robust report of what your FICO score would look like if certain characteristics are present.

Read more: How a FICO score is determined.

Denied A Credit Card Because Your Credit Score is Too High

Yep, you read correctly. Some consumers could be denied credit cards because their credit scores are…too high.

Gander Mountain, a Minnesota-based outdoors retailer, launched a federal lawsuit against World Financial Network National Bank of Columbus, Ohio, the company that co-brands its store credit cards, claiming it wants to turn away its most creditworthy customers.

The bank apparently wants to deny new credit card applications for roughly 25 percent of Gander Mountain’s customers, namely those with the highest credit scores.

And the sporting goods store is seeking a court order to block the practice, which seems to be nothing more than a numbers game for the bank.

If you think about it, why can’t credit card issuers adjust for risk and reward in both directions – credit isn’t really a right so much as it is a privilege.

Although World Financial didn’t comment on the lawsuit, it’s clear that top-tier card holders aren’t of much value to some companies because they generally steer clear of fees and pay down their balances without accruing interest.

But industry experts say they’ve never heard of card issuers denying potential customers for having excellent credit scores, especially at a time when most companies are only approving the lowest credit risks.

I’ve heard of credit card issuers denying serial balance transfer artists with good credit scores, but this is something entirely different.

Related: What is the highest credit score?

More New Credit Card Rules Coming Soon

Come August 22, there will be a series of new rules in place, intended to further protect credit cardholders, thanks to the good people at the Federal Reserve.

Late Fees Capped at $25

Late fees will generally be capped at $25, instead of the near-$40 currently charged by many of the nation’s leading credit card issuers.

There will be exceptions if the cardholder is a repeat offender, or if the card issuer can prove the higher fee is reasonable.

Fees Cannot Exceed Dollar Amount Tied to Violation

Card issuers will also be prohibited from charging a fee that exceeds the dollar amount associated with the consumer’s violation.

For example, a card issuer can’t charge a $25 late fee if the cardholder’s missed minimum payment is only $20.

Same with an over-the-limit fee – if you only go over by $5, the card issuer can only charge $5.

Multiple Fees on Single Violations Prohibited

Additionally, card issuers will not be able to charge multiple fees for a single violation, such as a single missed payment.

Inactivity Fees Banned

Credit card issuers will also be barred from charging “inactivity fees,” a strategy that was actually recently employed to recoup losses from the first set of new credit card rules.

Finally, card issuers who raised consumers’ rates since January 1, 2009 will need to evaluate if the reason(s) behind the increase has changed, and if so, reduce the rates.

I wonder how the credit card issuers will make up for all the lost profit?  Look out for new tricks folks…

Trend: Parents Opening Credit Cards in Kids’ Names

Cash-strapped parents are reportedly opening credit cards under their childrens’ names, according to CNN.

While it’s clearly not the right thing to do, some parents seem to have no place to turn but their children, especially after their own credit score is shot.

And because it’s so easy to do, what with their unprecedented access to their children’s personal information, the trend seems to be growing.

One college student told CNN that her father had taken out a student loan in her name without disclosing it – she found out later after her first credit card application was denied.

Apparently she’s stuck with the student loan and bad credit to boot.

Another example cited a father who opened three credit cards under his son’s name, and it wasn’t long before two were maxed out and all three were delinquent.

As a result, the child’s credit score dropped a staggering 150+ points, and could be in trouble for some time.

Typically, things work the other way around, with a parent co-signing with a teen or young adult to help them establish credit or get a loan.

For example, many parents designate their children as authorized users on their credit cards to help them build credit history.

But with times so tight and credit card issuers more hesitant to lend, everything seems to be out of whack.

If you ever get tempted to open credit in your child’s name, think twice, because it’s not worth ruining your child’s credit score and their chance of getting credit in the future when they need it most.

Colleges and Credit Card Companies Have Cozy Relationship

Many universities throughout the United States have quite the intimate relationship with major credit card issuers, according to an investigation by the aptly named Huffington Post Investigative Fund.

The publication obtained and scoured a number of “affinity agreements” between the credit card companies and universities, which must now be made public thanks to the new credit card rules.

However, getting your hands on them still seems to be quite a task (as expected), but what they found was definitely worth their time and energy.

Here are some of the key findings:

– Many universities are contractually obligated to share students’ personal info
– Some schools are paid $1 for each student who keeps a credit card open for 90 days
– Certain schools are paid $3 more per credit card when the student carries debt
– Some are paid 0.4% of all retail purchases made with the student credit cards

Based on their research, Bank of America appears to dominate the market, with roughly 700 schools believed to have affinity agreements with the banking giant.

In 2003, the University of Michigan agreed to $25.5 million for an 11-year contract with BofA, while Brown University accepted $2.3 million for seven years back in 2006.

And I’m sure the numbers are just going up – but the schools insist they need the money to pay for all the costs of running campus programs and balancing budgets.  I guess the $25,000 annual tuition isn’t enough these days.

Just seems a bit overboard when there’s an incentive for your students to carry a credit card balance…you’d think the students and universities would share the same goals, but that doesn’t appear to be the case.

The colleges win when their students lose (money), get into debt, and see their credit scores take a hit.

They should concentrate on helping students learn more about credit cards and other types of loans before agreeing to market them. In fact, it should be required curriculum.