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We’ve all seen the commercials on TV. We’ve heard the catchy jingles on the radio. Many of us (yes, I’ve done it too) have probably caught ourselves humming the tune while walking through the mall or grocery store. But how many of us really know what it all means?

I hope you’re confused at this point – ‘What’s this crazy guy talking about with all this singing and asking for my number?’ I’m talking about the world of credit reports and credit scores, of course! 

Some sources say we can see our scores and reports for free. Others say we have to pay a one-time fee or buy a monthly subscription. Which information is free and which requires a payment? Which score is which? With so much information swirling around, many people have told me they became frustrated and gave up.

Don’t give up!

Maintaining (or working toward) a good credit picture will help you throughout your personal finances. It could save you lots of money during your life – money that could be put to use in your retirement account.

There are two different things lenders and credit providers are looking at: your credit report and your credit score.

A credit report is a file of your credit history maintained by one of the credit reporting agencies. The file will show a history of your credit accounts and data about your ability to make payments on time.

There are three credit agencies that maintain your credit report – TransUnion, Experian and Equifax. While most people believe the information obtained by one bureau is going to be the same at all three, this is not always the case. Because of the potential for differences, it’s important to monitor all three credit reports to be sure any errors are corrected.

You can monitor your credit reports by going to www.annualcreditreport.com. This site is run by the Federal Trade Commission and was established as a central website for the three reporting agencies to provide free copies of credit reports. That’s right, FREE! Every twelve months you’re legally entitled to a free report from each of the three reporting agencies – you can look at them all at once, or, do what I do and check one report every four months.

Your credit score is based on a mathematical model that uses the data in your credit report to estimate the level of risk a company would be taking by lending to you or offering you credit. Each credit reporting agency uses different methods to calculate your risk, so you’ll have multiple credit scores. The higher your number, the lower risk you’re assumed to represent.

While a lot of the math behind the computation of your score is kept secret, there is information available about what factors help make up your score:

1. Payment History (approximately 35%) – If history shows you’re frequently late on payments (or don’t make them at all), a lender will see you as high-risk.
2. Amounts Owed (approximately 30%) – Having a lot of debt, or constantly maxing out your credit cards, can make you a high-risk individual. With maxed out credit, one emergency could mean loans aren’t paid.
3. Length of Credit History (approximately 15%) – The longer the history, the better. Longevity shows lenders you have experience with loans and have (hopefully) managed them responsibly in the past.
4. New Credit (approximately 10%) – If you’re constantly applying for loans and new credit cards, lenders are going to start to wonder if you’re struggling to make ends meet.
5. Types of Credit Used (approximately 10%) – Similar to the Length of Credit History category, lenders want to see that you have experience handling different categories of credit.

The most reliable source I’ve found for learning about your credit score is www.myfico.com.

Lenders look at your FICO score to determine whether to offer you credit and at what rate. If you want to see your credit score, you can purchase (sorry, not free for this one) the report through the MyFico website. You’ll also have the option to purchase your FICO score from the three credit agencies when you request your credit reports from annualcreditreport.com.

There are well-known companies advertising “free” credit score offerings. If you choose to use a “free” credit score provider, read and reread all the fine print. You generally have to enroll in a paid service to receive a free copy of your credit score – some will make you enroll in a monthly service with only a short window of time to cancel your account before they start charging you.

If you have any questions about your credit reports or credit score, feel free to contact me at jmcculloch@smart401k.com. Or you can reach any member of our adviser team via phone at 877.627.8401 or email info@smart401k.com.

Joe McCulloch

Smart401k Senior Investment Adviser

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About Smart401k

Smart401k is a web-based investment advisory service providing unbiased recommendations to help people invest in employer-sponsored retirement plans. Smart401k provides service to nearly 11,000 clients who collectively have more than $2 billion in assets. Plan participants receive personalized, fund-specific investment recommendations and the support of professional investment advisers available to discuss all investment questions. Based in Overland Park, KS, Smart401k is online at Smart401k.com.