Wednesday Websites #1: Credit Karma

Last weekend I wrote about credit reports.

But there is another thing that companies use when determining your financial acumen - the credit score. If your credit report is like your credit report card, then your credit score is like your GPA. The credit score is a proprietary number calculated by one of several credit bureaus. They take all of the information covered in your credit report - payment history, amount of outstanding debt, etc - and boil it down into one number that is supposed to predict your credit worthiness.There are several credit scores, but the most common is the FICO (Fair Isaac Corporation) score.

Your income is not considered at all in your credit report or your credit score. You could be making a million dollars a year, but if you are borrowing 2 million dollars and having trouble paying it back, you could still have a very low credit score. Your score simply describes your likelihood of paying back your debt responsibly.

Although you are entitled to one free credit report annually from each of the three credit bureaus, you are not entitled to free credit scores. You can purchase them as an add-on to your credit reports at annualcreditreport.com, or you can purchase them individually. Since each score purchase runs $7-$12, that can add up very quickly.

But luckily there is an awesome website that allows you to get your credit score for "free"! At CreditKarma.com you can obtain your credit score as frequently as you want, and it will not cost you a dime. They pay the $7-$12 fee for you by posting related ads around the site.

Once you are on Credit Karma's website, please explore! It is chock full of helpful information, and literally breaks your credit score into sections and gives you a grade on each so you can see what parts of your credit activity you need to improve. These sections include:

-- Credit utilization
-- Percentage of on-time payments
-- Average age of open credit lines
-- Total accounts (number and type)
-- Hard credit inquiries
(When you apply for credit, they make a 'hard inquiry', which affects your score. If you check your own credit, it is a 'soft inquiry' and does not affect your score)

The other amazing part of the site is the Credit Score Simulator. Here, you can input potential changes to your credit activity, such as closing a credit card, increasing a credit limit, or making a late payment, and you can see how it will potentially affect your credit score. From my experience it is fairly accurate too! When I increased one of my credit limits by $2000, it showed that my credit score would increase by two points. So I called up my credit card company, asked them to increase my limit by that amount, and sure enough, my score went up two points!

This is a really useful tool to help you wrap your head around the complexities that make up a credit score. Check it out!

Step 2: Cracking Your Credit Report

Step 2 is still part of the initial step of understanding your finances.

The most critical piece of information when it comes to your credit history is your credit report. The credit report is like your financial report card. This (or the credit score, which is based off your credit report) is the first thing any company will look at when you apply for a loan, for a credit card, for any form of credit.

What's on a credit report?
The information on your credit report contains several key factors that businesses use when determining if you are trustworthy enough to be lent money. Some of these factors include:

Types of accounts
Do you have credit cards? Car loans? Mortgages? Student loans? They will all be on your credit report. Issuers of credit want to see that you've been responsible with similar types of credit in the past - hence, if you have a car loan in good standing on your credit report, you'll be more likely to get a good rate on a car loan in the future. 

Balances on accounts
Yes, your credit report actually shows how much credit you are using. Companies look at how much of your available credit you are currently using when making the decision to issue additional credit. If you are constantly close to your limit on every card, they will probably assume that you would do the same thing if they give you another card.

Payment history
Payment history is critical. If you have been paying your bills on time, with no late payments, for years and years, you are awesome. However, not everyone is in that situation. Most people slip up once in a while and pay a credit card bill a few days late, or the cable payment gets bounced back because of insufficient funds. All of those late payments show up on your credit report. All of those payments for the last SEVEN years. If you are consistently late on all your payments, it looks bad to the banks who might otherwise want you as a customer. They would consider you a risky bet, and might not issue you credit. If they do issue you credit, it may be at a high interest rate to cover their investment in case you forget to pay permanently.


Ok. Now that you know the basics of what is on your credit report, time to go get yours!! Go to AnnualCreditReport.com (not Freecreditreport.com, or any other version). You are allowed one free copy of your credit report from each of the three issuers per year. That means you don't have to pay if you want your credit report once per year. Remember - make sure it is annualcreditreport.com - that's the free one.

If you go to a website like freecreditreport.com, you will be automatically enrolled in their program, with a monthly fee, unless you call and opt-out within 30 days. Hey, they need some way to finance those addictive commercials!

So enter your information, get your three credit reports, print them out, and then LOOK CLOSELY at them. Compare the three. Are there any accounts missing? Are there any accounts on it that aren't yours? Double check them very very closely. This is your financial report card - you want the grade to be as high as possible, right?

Go back to the list you made for Day 1. Compare that list to your credit reports. Make sure you have everything on both lists. If you are missing something from your Day 1 list, add it. If you are missing something from the credit report, call them up and add it (unless you know you have a lot of late payments on that account, and then it would help you to just let the credit agencies figure it out on their own time).

If you have fraudulent activity on your credit report, FIX IT! Fix it as soon as possible. It may be a headache to have to call the credit agencies, or your credit card company, or whatever, but it is totally worth it in the long run. You don't want some criminal racking up charges for flat screen TVs and ruining your ability to purchase said TV in the future.

This is something you should do every year. Check your credit reports. Make sure they are accurate.