For healthy credit, read your credit report

Major credit card issuers are lining up to offer free FICO scores, allowing more people than ever to become intimately familiar with their credit score. But what about credit reports, which have been free for years?

“Fifteen or 16 years ago, no one knew about credit scores,” says Bruce McClary, a spokesman for the National Foundation for Credit Counseling. “Now you can get them anywhere, like a vending machine. The disconnect is that consumers know the number but not what the driver is.”

Your credit score is a three-digit summary of the information in your credit report — useful, but not the full story. If your credit card issuer offers free scores, you can track yours on your monthly statement or by logging into your account online. But unless you understand how your credit card usage and other financial activity appears on your credit report, you’re just guessing about the cause of any rise or fall in your score.

In a 2015 survey, the American Bankers Association found that 60% of consumers had checked their credit report in the previous 12 months and 66% had checked their score. But just how many people really looked at their report is unclear: In the same survey, 44% said that credit report and credit score were different names for the same thing.

How credit card use factors into scores

A quick look at the factors that make up your FICO score, the credit scoring model used by most lenders, immediately makes clear how easily you can harm your credit with careless credit card use — or help it with responsible actions:

• Payment history: 35%. Bills paid more than 30 days late will show up on your credit report and hurt your score.
• Amounts you owe (both in total and as a percentage of available credit): 30%. High balances or maxed-out cards can knock points off your score, even if you’re keeping up with payments.  
• Age of accounts: 15%. Old accounts are good for your score, so closing credit cards can hurt you.
• New accounts: 10%. Applying for or opening too many new credit cards within a relatively short period of time is a red flag to scoring models.
• Credit mix: 10%. Credit score algorithms tend to reward a diverse mix of credit accounts.

The level of detail offered in credit reports makes them invaluable for understanding how your actions affect your score.

“Your credit report is just as important as your score,” says credit expert Beverly Harzog, author of “The Debt Escape Plan.” “You need to start with your credit report. Wherever you are in credit life, you want to check your report.”

Since the federal Fair Credit Reporting Act was amended in 2003, everyone is entitled to a free credit report once a year from each of the major credit-reporting bureaus — Equifax, Experian and TransUnion. You can access those reports at AnnualCreditReport.com. “Take advantage of that,” Harzog says. “I spread them out, one every four months. It’s also a chance to spot fraud. Fraud can occur when someone gets your personal information and then opens accounts in your name.”

Reading your credit report

So what do you do once you get the report? “Look at the report very carefully: personal information, the accounts listed, everything. Be sure there are no errors or mistakes,” Harzog says. “If there is a missed payment, say, and it’s not true, write to the credit bureau and get it fixed. And remember, lenders don’t necessarily report to all three bureaus, so there might be different information on each [report].”

Sometimes, you may not recognize an account listed on your credit report. “If you’re not sure who the creditor is, just Google the name,” Harzog says. “If you can’t figure out the account, it may not be something you opened.”

Conversely, if an account is missing from your report, contact the credit card company or creditor and ask that your account be reported the credit bureaus, so that your responsible credit use is reflected in your score. Making sure your credit report is accurate is ultimately your responsibility, not that of the credit bureau.

Tips for managing credit cards

After you’ve checked your credit report, make a plan to manage your credit to your greatest advantage. If you’re fairly new to credit, you can’t do much about the length of your credit history. But even if you have only one credit card, you still can take steps to improve your credit score.

Never pay late or default on a credit card. Paying on time is the single most important element of your credit score — and it’s not hard to do. “There are so many ways to help you do this,” Harzog says. “Automatic payments, email alerts so you don’t miss payments, financial management software like Mint. Pay all bills on time so you will have good credit.”

Keep credit utilization low. Credit card issuers don’t want to see that you’re using all of your available credit. In general, aim to keep utilization below 30%. The lower, the better. “If you keep it below 10%, you can maximize your score,” Harzog says. Credit expert John Ulzheimer, who worked for FICO, has said that people with FICO scores of 780 and up have an average of 7% utilization. “That may seem hard to do,” Harzog says, “but there are things you can do to lower your utilization. Call your issuer and ask when they report to the bureaus. If they tell you, you can pay before they report your payment history, so your balance is zero.”

Don’t open a lot of new credit cards. A sign-up bonus of 40,000 miles for opening a new credit card looks great, and so does that $150 cash bonus on another card. But applying for both of them can hurt you. “When you open a credit card account, they’ll do a hard inquiry on your credit report,” Harzog says, “and that can make your score drop anywhere from 2 to 5 points for each inquiry. It’s not like looking for a mortgage, [in which case] the FICO score can recognize you’re rate shopping. Credit cards aren’t like that.”

Don’t keep moving balances from one card to another. Balance transfer offers are attractive if the cards provide a 0% annual percentage rate for a period of time. “If this is a chance to transfer high-interest debt to a 0% card, you’ll eventually help your score,” Harzog says. “Getting out of toxic debt has to be your focus.”

But if you’re still carrying the transferred balance at the end of the 0% period, you could be charged the ongoing APR on the entire amount. Remember that you’ll usually pay a balance transfer fee of 3% or 4% on the amount you’re transferring, and the 0% APR may apply only to the transferred balance, not new purchases.

Keep accounts open. Say you transfer a balance to a new card and think the responsible thing to do is to close the old one. “People think of consolidating debt as a good thing and generally it is,” says NFCC’s McClary. “But if they follow up by closing accounts that were paid off, they don’t think of the ramifications on the credit score. You’re bringing the available credit ceiling closer to the amount you owe.”

Harzog doesn’t recommend closing a credit card account, but notes that there is one circumstance when you might. “If it’s a reward card with a high annual fee and you’re not using it, close it. But first, apply for a card that’s more appropriate for you,” she says. “Get the new card in place before you close the other card.” This way, your credit utilization ratio won’t go down, assuming the credit limits are the same.

Ask about reports sent to credit bureaus. If you open a secured credit card to build your credit score, be sure the issuer reports your payment history to the credit reporting agencies. Not all of them do. Also, if you use a prepaid debit card, that won’t be reported either.

“You can choose to have a great score, you really can,” Harzog says. “It’s all about getting your foundation in place. Make a budget and track expenses. Manage your money responsibly. And keep an eye on your credit report.”

Ellen Cannon is a staff writer at NerdWallet, a personal finance website. Email:ecannon@nerdwallet.com. Twitter: @ellencannon.

This article first appeared at NerdWallet.