Understanding Your Credit Score and Report

If you've ever obtained a mortgage or car loan, it's likely your credit history and personal credit score have been checked in order for you to receive that loan. Understanding your credit score and taking steps to improve it can help you maintain a healthy financial outlook.

The importance of credit

In the simplest terms, credit is money you borrow and promise to pay back, typically with interest. Types of credit include revolving credit, such as credit cards; automobile and personal loans; and home purchase, refinance and equity loans. Having access to credit is important, as it can be useful in times of emergencies, is sometimes more convenient than cash, and allows you to make large purchases. Responsibly using credit can help you to establish a strong credit score. However, misusing credit can potentially cause financial problems.

What is a personal credit report?

Your personal credit report is a summary of information on file with a credit bureau, a company that collects data about how people handle credit. The three major credit bureaus are Equifax®, ExperianTM and TransUnion®. Your personal credit report contains information about your financial background, including, but not limited to:

  1. The total number of credit accounts you have open, including mortgages, credit cards, automobile loans and other accounts
  2. The amount you owe on each account and the monthly payments you must make on each

  3. Your repayment history

  4. Delinquent accounts

  5. Derogatory accounts

  6. Accounts that have been closed

The report will show inquiries – when an organization such as a bank or retail store requests a copy of your report. It will also show public records – such as judgments, state or federal tax liens, and bankruptcies – and the total amount of money involved.

How a credit score is determined

Your personal credit score is generated by a mathematical formula using information in your credit report. Credit scoring was first developed in 1958 by Fair Isaac Corporation to help predict whether a borrower will repay their loan on time. The resulting score is commonly called a FICO score, after Fair Isaac. Higher scores are better than lower scores.

When a credit bureau calculates your score, they do not take race, religion, age, sex or marital status into account. Neither does your income, occupation or employment history figure into the score, nor if you've been turned down for credit.

Check your credit report

Review your credit report for accuracy, and immediately report any errors to the credit bureau or directly to your financial institution. The three major bureaus are required by law to provide a free personal credit report once a year at your request. They will also provide it for free under certain circumstances, such as if you were recently denied for credit, or if you suspect someone has been fraudulently using your account.

Strengthen your credit score

Credit scoring is predicated on factors including: your payment history, the level of outstanding debt, the length of your credit history, the number of inquiries on your report, and the types of credit present. By understanding your credit score, you can learn how to improve on each of these factors and try to boost your personal credit score.

  1. Improve your payment history by paying all your bills consistently and on time. Carefully consider any offers from creditors to "reduce" or "skip" payments before accepting

  2. Get current on delinquent accounts to reduce your outstanding debt and to avoid having delinquencies reported. Keep balances low on credit cards

  3. Build on your credit history. The longer you've had credit, particularly if it's with the same credit issuers, the better for your credit score

  4. Think twice before applying for too much new credit. Don't open accounts you don't need, as inquiries made on your credit report could lower your score

  5. Diversify your credit. A large number of revolving credit accounts with open balances, for example, can result in a lower score than a combination of mortgage, installment and revolving credit balances

Repairing and managing credit

A low credit score can translate into higher loan and credit card interest rates. It can also inhibit your ability to secure insurance, school loans, rental housing, utilities and even elective medical procedures.

If you have credit problems, work to repair your credit on your own or use a credit-counseling agency. Ask several agencies about services, fees and repayment plans before signing a contract. Beware any that ask you to pay up front or promise a quick fix – it may take years to repair credit legitimately.

If you find errors on your credit report, correct them as soon as possible. To dispute an error, contact the financial institution that reported it or go directly to the credit agency. Provide all necessary details in writing. They then have 30 days to investigate, submit any corrections needed to credit agencies, and provide a written response. Learn more about disputing information reported by TD Bank

To protect your credit in the future, create a budget and pay bills on time, every time. Consider fees, interest rates and monthly payments before obtaining new credit. The sooner you begin to re-establish good credit, the sooner you'll improve your credit score.

Stay on top of your credit score

TD Bank has services, resources, tips and tools to help you track your credit score.

Have a question? Find answers here