Credit Reports & Scores

What is credit?

Credit is the ability to borrow money or acquire goods and services with the promise of payment in the future. It is often offered by credit unions, banks, lenders, and credit card companies, and approval or denial is based on factors such as income and credit history. There is typically a cost associated with using credit in the form of fees and/or interest.

Why is credit important?

Credit plays an important role in managing personal finance and achieving financial goals. It allows individuals to purchase goods and services they need but can’t afford, including homes, cars, and education, and pay them off over time. The monthly repayments on these purchases can help make cash flow management and budgeting easier.

Credit is also essential for building a credit history, which credit unions and lenders use to evaluate a borrower's creditworthiness when applying for loans, credit cards, and mortgages. A good credit rating helps borrowers qualify for larger loans and credit limits, as well as lower interest rates. A credit history is also used on other occasions, such as employment, insurance quotations, rental/lease applications, and utility services. Without credit, it can be difficult to qualify for these services or be eligible for job opportunities.

Overall, credit is important because it provides people with the ability to access resources and opportunities that would otherwise be out of reach. However, it's crucial to use credit responsibly and understand the costs and risks associated with borrowing. Check out the NCUA’s Money Basics Guide to Budgeting and Savings to learn more about managing your money and starting good money habits.

Types of credit

There are three common types of credit:

• Revolving Credit: It allows borrowers to access a line of credit that they can make purchases with up to a credit limit, pay back the balance over time, and then continue to use until such a limit is reached or the account is closed. Credit cards are the most common example of revolving credit. Borrowers usually use revolving credit for everyday expenses, but some also use it to pay for automated and recurring bills.
• Installment Credit: This credit is borrowed in a lump sum and then repaid in fixed monthly installments over a set period of time until paid in full. Examples of installment credit include car loans, mortgages, student loans, and personal loans.
• Open Credit: It provides access to a certain amount of credit that needs to be paid in full at the end of each period, usually monthly. Because the balance must be paid off by the due date, this credit rarely appears on credit reports and doesn’t accrue interest charges. If the balance is not paid in entirety, however, there can be late fees, other penalties, and derogatory remarks on credit reports. Examples of open credit are utility bills and charge cards.

What is a credit report?

A credit report is a detailed record of an individual's credit history and this information is used by lenders to determine the individual's creditworthiness and ability to repay loans. It typically includes 4 sections:

• Identifying information: name, address, social security number, and date of birth
• Credit accounts: lender/creditor information, amount, terms of the account, and payment history
• Credit inquiries: how often credit is applied for
• Collections and public records: bankruptcies, credit-related public records, and collection accounts

It is important to regularly check credit reports for accuracy and to address any errors or discrepancies to avoid negative impacts on borrowing opportunities. Continue to read and learn about how to make disputes on credit reports.

How to build a credit history

According to a CFPB report, 26 million Americans do not have any credit history with one of the main credit reporting agencies. Whether a consumer is a young adult or wants to build a credit history after being credit invisible for a long time, the following ways can help.

• Get a secured credit card. A secured credit card requires a cash deposit as collateral for the credit limit and is a good option for those with little or no credit history.
• Apply for a store credit card. Many gas stations and retail chains offer credit cards that can only be used in their stores online and offline. These cards tend to be easier and faster to get approved.
• Add a co-signer to a loan application. A co-signer is someone with a credit history who provides their financial information and signs another person’s loan application by pledging to repay the loan if it goes unpaid.
• Become an authorized user. A credit card holder can add a family member or trusted person to their credit card as an authorized user. An authorized user is then given access to the credit card and can start building a positive credit history as long as the payments are made on time.

What is a credit score?

A credit score is a numerical representation of an individual's creditworthiness, which is based on the information in their credit report. It indicates the level of financial risk associated with lending money to an individual and the likelihood of them to repay their debt on time.

Credit scores are generally used by lenders to determine whether to approve a loan or credit application and to set the interest rate and terms of the loan. Credit scores are also used by landlords, insurance companies, and employers to evaluate an individual's trustworthiness and financial reliability. A good credit score can lead to lower insurance premiums, better rental terms, and even better job opportunities.

What goes into a credit score?

Credit scores are calculated using a formula that takes into account various factors. The FICO score, the most commonly used credit score, ranges from 300 to 850 and uses five main components, including payment history, amounts owed, length of credit history, recent credit inquiries (new credit), and types of credit used (credit mix).

The higher the score, the more creditworthy the individual is considered to be. A high credit score can increase the chances of getting approved for a loan or credit card and can lead to better interest rates. A low credit score, on the other hand, can lead to higher interest rates, which can make it more difficult to pay off debts.

If you need to speak to somebody, some credit unions offer free credit counseling services to their members.

How to get a free credit report

Under the Fair Credit Reporting Act (FCRA), consumers are entitled to one free credit report per year from each of the three major credit reporting agencies – Equifax, Experian, and TransUnion. In September 2023, these credit reporting agencies agreed to offer free credit reports weekly instead of once per year to encourage consumers to regularly check their credit data and build and protect their financial health.

To order, consumers should visit AnnualCreditReport.com, call 1.877.322.8228, or mail the completed Annual Credit Report Request Form to:

Annual Credit Report Request Service
P.O. Box 105281
Atlanta, GA 30348-5281

While consumers have immediate access to their credit reports when ordered and authenticated on AnnualCreditReport.com, ordering by phone or via mail can take up to a couple of weeks for the reports to be mailed.

How to dispute errors

Errors and discrepancies are commonly found in a credit report. According to an FTC study, 20 percent of consumers have an error on at least one of their three credit reports. These errors can negatively impact their credit scores, which can, in turn, affect their borrowing opportunities and ability to secure loans, credit cards, apartments, and even employment. It is recommended that consumers check their credit reports at least once a year to ensure the information is accurate and up to date.

If an error is found on a credit report, under the Fair Credit Reporting Act (FCRA), consumers have the right to dispute it by following the specific credit reporting agency’s dispute instructions. The main credit reporting agencies have their own online dispute center that allows consumers to self-fie a dispute, upload supporting documents, and check the dispute status and result.

The Fair Credit Reporting Act (FCRA) mandates that once a dispute is submitted, the credit reporting agencies must investigate to determine the accuracy and record the dispute result or delete the disputed item(s) within 30 days. If the error is related to fraud or identity theft, be sure to contact the creditor as well to file an official dispute and get a documented explanation of the issue. For more information, visit the NCUA’s Fraud Prevention Center.

Remember, it's important to regularly monitor your credit report and dispute any errors as soon as possible to avoid any negative impacts on your credit reputation.