A single parent recently asked about the wisdom of having a credit repair clinic help clean up her credit report so she could obtain a mortgage on more favorable terms. The expected fee? In excess of $600! Credit repair clinics are notorious for generating consumer complaints to the Federal Trade Commission. They frequently make promises they can’t fulfill, and are unable to accomplish anything you can’t do for free.  

Let’s review what you need to know about credit reports and credit scores so you can manage them effectively on your own. 

Honoring commitments

First, remember that credit reports and scores only come into play when you borrow money. They exist to help lenders and others understand your credit-worthiness.  

Keep in mind that when you borrow, you are making a promise. As the Catechism of the Catholic Church says, “Promises must be kept and contracts strictly observed to the extent that the commitments made in them are morally just. ... Contracts are subject to commutative justice which regulates exchanges between persons and between institutions in accordance with a strict respect for their rights. Commutative justice obliges strictly; it requires safeguarding property rights, paying debts, and fulfilling obligations freely contracted” (Nos. 2410-11). Our credit reports and scores should reflect the seriousness with which we make such promises. 

Credit reports and credit scores aren’t the same thing. Credit reports reflect one’s history of credit activity. Credit scores are numeric values assigned by computer models based on the data in the credit reports. 

Breaking it down

While we expect lenders to look at our credit scores and credit reports, the information is used more broadly than just for lending.  

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In addition to lenders, landlords, insurance companies and employers all rely on credit scores and reports to help them assess whether they want to do business with you.  

Keeping your credit reports clean and your credit scores high can save you lots of money over the long run. For example, if you are in the market for a $300,000 mortgage and your score is 620 rather than 760, your interest rate will be 1.6 percent higher and that will cost about $3,400 per year. 

What are the keys to achieving a high credit score? The FICO (Fair Isaac Companies) credit score, which is the most widely recognized, bases their score primarily on five common-sense credit attributes, including: 

The bulk of your score (35 percent) is a function of your payment history, which basically means paying your bills in a timely manner. 

Thirty percent of your score relates to how much you owe — primarily in comparison to how much credit you have available. Keeping balances higher than about 35 percent of your available revolving credit will negatively impact your score. 

Length of credit history, which accounts for about 15 percent of your score. Creditors like to see the fact that you have managed credit issues well for an extended period of time. 

New activity and the types of credit utilized each make up 10 percent of your score. Excessive new activity can make lenders nervous. 

Recognize that you don’t have just one credit score. FICO generates a separate score based on information from each of the three major rating agencies: Experian, Transunion, and Equifax. You can expect these scores to be somewhat different, given that each agency may have somewhat different data. 

Keeping current

The credit reporting agencies are required by law to provide you with a free copy of your credit report once per year. You can obtain your free report at annualcreditreport.com. I suggest you download a different report every four months as a way to keep current with your information.  

While you cannot obtain a free FICO score, you can estimate your score using the FICO score estimator calculator at www.bankrate.com. God love you. 

Phil Lenahan is the president of Veritas Financial Ministries (VeritasFinancialMinistries.com) and the author of “7 Steps to Becoming Financially Free” (OSV, $19.95). Submit questions for columns to askphil@osv.com.