Exercises: Credit Reports and Credit Scores

Name the three major national credit bureaus in the United States. Then explain in one or two sentences what a credit report is and what kind of information it contains.

A FICO credit score is based on five factors: payment history, amounts owed, length of credit history, new credit, and credit mix. List these five factors in order from the one that usually carries the most weight to the one that carries the least. Then state the range of FICO scores.

Classify each event as a soft inquiry or a hard inquiry: (a) You check your own credit score through your bank's app. (b) You apply for a car loan and the lender pulls your credit report. (c) A credit card company sends you a "pre-approved" offer after reviewing your file. (d) You apply for an apartment and the landlord runs a credit check as part of the application.

Mateo, 19, wants to check his credit report. Explain how he can get his free reports from the three bureaus, and describe the steps he should follow to dispute an item he believes is an error, such as a credit card account that is not his. Explain what the bureau must do after receiving the dispute.

Aaliyah has a credit card with a credit limit of $\$4,000$. Her statement balance is $\$1,800$ this month.

(a) Calculate her credit utilization ratio as a percentage.

(b) Explain which score factor utilization belongs to.

(c) How much would she need to pay down to bring her utilization to 30%?

Over two months, Ethan submits applications for four different credit cards. Each application results in a hard inquiry. Explain how this behavior could affect his credit score and his chances of approval. Then explain why checking his own score ten times in the same period would not have the same effect.

Olivia and Jayden are both 24 and each want to rent an apartment. Olivia has a score of 780: she has paid every bill on time for 6 years, uses about 8% of her credit limits, and has two cards and a small car loan. Jayden has a score of 610: he has two payments 30 days late in the last year, uses about 85% of his limits, and recently opened three new cards.

(a) Identify at least three score factors that explain the difference between them.

(b) Describe two steps Jayden could take over the next year to raise his score, and explain why each works.

(c) Explain why a landlord or lender might treat the two applicants differently, including the possible effect on the cost of borrowing.

Sofia, 22, has a credit card with a limit of $\$2,500$ and a balance of $\$2,000$. She also has another card with a limit of $\$5,000$ and a balance of $\$500$. She is thinking about closing the older $\$5,000$ card, which she opened 7 years ago, because she rarely uses it.

(a) Calculate her overall utilization ratio now.

(b) Calculate her overall utilization ratio if she closes the $\$5,000$ card and nothing else changes.

(c) Explain at least two ways closing this card could hurt her credit score, and recommend an alternative, with reasoning.