Credit scores are extremely important with regards to your financial well being. They are needed for everything, from buying a home to buying a car and even for employment screening. Although these scores are very important, they are not very well understood by the vast majority of people. Most people don’t know what makes up their credit score, what can have a negative impact or what can help improve it. If you fit into this category, you could likely benefit from having credit scores explained in plain and simple English.
At the very base of a credit report is a credit score. There are actually three bureaus, and three different credit scores. Depending on the type of credit you are applying for, the lender may be using one credit score or another, so it is important to manage all three.
Your credit score is made up of a mix of things. These things include how many accounts you have open, how long they have been open for, the variety of accounts you have had, the payment history on your accounts and whether you have collections, judgements, bankruptcies, foreclosures, charge offs, etc. All of this plays a part in your score, and we will go into more detail on the other aspects later, but right now we want to concentrate on the simplest explanation of credit scores possible and give some information that can help the greatest number of people with the least amount of effort. By concentrating on just one item, you can really have a big impact on your credit score. This item is your payment history.
At the very basic level, you should know that late payments will be reflected on your credit report, and these late payments will impact your score negatively. In order to be reported as late, you must be 30 days late. After the first late, there are notations for being 60 days, 90 days and 120+ days late. Each one of these is another ding against your credit score.
There is another way late payments are reported. This reporting is called a ‘rolling late’. If you have a 30 day late reporting, and you make the next payment, but remain one month behind, you will see what is called a ‘rolling 30’. This means you are 30 days late on a rolling basis. You are making payments each month, but you started a month behind and have not caught up. This is going to have a negative impact on your score too, as even though you are making payments each month, you are still a month behind. By simply paying your credit cards and other reporting debts on time, you can manage your credit.
As an extension of this thought, the more time that has passed between a late payment and the date your credit is pulled, the less that late payment will impact your score. So if you’ve had a lot of late payments and decide today to make the effort to pay on time each month, a year from now those late payments will have a smaller impact than they do today. Two years from now, that impact will be even less. This is coupled with the fact that your most recent credit history is weighted the most. Due to this, your most recent months of paying current give you a boost. So if you only take one thing away from having credit scores explained to you, it should be to pay your bills on time. Just doing this will have a huge impact on your credit.
Another item to consider when taking about late payments is your credit card issuer. If you have been with a credit card company for a long period of time and have been current or are a valued client, sometimes you can get cut a little slack. If you check your credit report and you see that a late has been reported, sometimes you can call your credit card company and simply ask them to remove it from your report. It does not always work, but if your credit history is pretty clean and you end up being late it is worth a phone call to see if you can get it removed. Most people don’t consider this, so most people don’t ask.
Check back in as we continue to explain more about credit reports!
