LOS ANGELES, Calif. (FOX 11) - With more than 20 years in the information services industry, Rod Griffin is a recognized expert in consumer credit reporting and scoring, fraud and identity theft and other consumer information and data use issues.
As the Director of Consumer Education and Awareness, Griffin is responsible for Experian’s national consumer education programs and outreach. He holds a B.S. in journalism from the University of Kansas and has a Fair Credit Reporting Act certification from the Consumer Data Industry Association.
CREDIT SCORE BASICS
WHAT A CREDIT SCORE IS AND WHY IT MATTERS
A credit score is a tool lenders use to analyze the information in a credit report to help them assess risk and make lending decisions. Scoring models are computerized formulas developed by studying how millions of people actually repaid or didn’t repay debt over time. These models are used to compare the information in your credit report with this proven track record to determine your relative risk – the chance you may become delinquent on account payments or default on a loan. A credit score is a number that represents the result of that analysis.
HOW CAN I CHANGE MY CREDIT USE TO GET A BETTER SCORE?
A credit score represents the information in your credit report. You can’t improve your credit scores without addressing the information from your credit report that most affected the scores. That information is identified by risk factor statements, which are generated along with the score at the time it is calculated. Addressing these factors will improve your creditworthiness and your credit score over time.
UNDERSTANDING RECENT ACTIVITY
Credit scores include a category called “recent activity,” which only accounts for about 5% of the score total. Inquiries fall into this category, but they’re only one small part of it. Things like recent increases in credit card balances, paying off balances, new late payments, late payments falling off the report, are part of this category, too. Essentially, this category covers what’s happened in the last 3-6 months that might indicate risk.
WHAT IS AN INQUIRY?
An inquiry is simply a record of someone reviewing your credit report. Only inquiries due to an application for credit or other services affect credit scores. An inquiry represents potential new debt that doesn’t yet appear as an account in your report. For that reason, it represents a bit of risk, and can have a small effect on scores.
HOW CAN AN INQUIRY IMPACT YOUR SCORE?
Inquiries remain on a credit report for two years as required by the Fair Credit Reporting Act (FCRA). However, they only affect scores in any meaningful way for a few months. By that time, there will be a new account on the report, which then represents the risk, or there won’t be a new account, so the inquiry does not represent risk. FICO says inquiries typically account for no more than 5 or 10 points and that the impact decreases rapidly. FICO scores exclude inquiries from the calculation if they are more than 12 months old, even though they are still on the credit report.
CAN I GET DENIED BECAUSE OF AN INQUIRY?
An inquiry alone will never cause a person to be declined or pay higher rates. Because they have such a small effect, inquiries only become a meaningful factor if a person’s credit scores are already marginal. For that to be the case, they must have other, much more significant issues with their credit history. To improve your scores, you must address those issues, not focus on an inquiry.
WHAT ABOUT SHOPPING FOR A CAR LOAN OR MORTGAGE?
Credit reports may be viewed multiple times when shopping for the best car loan or mortgage terms. Each time the report is reviewed an inquiry will be added to the credit report. Credit scoring systems recognize that you are shopping for the right loan, so only count the inquiries within a short period of time as a single inquiry. The newest scoring systems from FICO and VantageScore actually exclude inquiries for auto loans and mortgages from the score calculation. So, you can shop for the best terms and not worry about the inquiries.
TIPS FOR MANAGING YOUR REPORT TO IMPROVE YOUR SCORES
1. Establish a credit report (this content is used to calculate your credit score)
2. Always pay on time as agreed (late payments are the first sign of impending credit problems)
3. Have a mix of credit, but obtain and use a credit card (you decide how to use the card and repay the balance – this says a lot about how you make credit decisions)
4. Close accounts with caution (this can negatively impact your credit score)
5. Use good judgment when applying for credit (many inquiries in a short time might suggest you’re trying to take on large amounts of debt)
6. Time is the key (it takes time for your credit report to be updated)
7. Demonstrate stability (lenders may look beyond your financial transactions)
8. Have a plan (know how you’re going to repay debt when you use your credit card or get a loan)
9. Put credit to work for you (take advantage of low rates, convenience, rewards, etc.)
10. Share your knowledge (help friends and family avoid pitfalls and mistakes you might have made)