Given the myriad rules and regulations governing credit reports and scores, many consumers do not fully understand these important sources of financial information. Therefore, in order to facilitate greater financial literacy and promote sound fiscal decision making, we closely examined the relevant laws and compiled this Credit Report & Score Bill of Rights.

This document is a summary of your rights and as a result does not include the full details of the pertinent laws. If you want to see the laws in their entirety, check out the Fair and Accurate Credit Transactions Act of 2003, The Fair Credit Reporting Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, and the Credit Repair Organizations Act.

Credit utilization refers to how much of your available credit you use on a monthly basis. It’s extremely important that your spending not approach your credit limit because FICO—the largest credit scoring agency in the United States—factors credit utilization into its scoring in the form of a balance-to-available-credit ratio, and the lower it is the better. This is one of the most important tenets of credit card use, and failing to adhere to it could lead to lowered credit standing.

Still, there are various myths and misconceptions that mislead consumers and hamper their efforts to use credit responsibly. Because a proper understanding of credit utilization is essential to responsible credit card use, we at Card Hub decided to tackle some of the most important credit utilization questions and expose the facts behind this significant aspect of credit card use.

There are various quantitative and qualitative ways to determine if you have bad credit—the easiest and most definitive of which is if you have a FICO score of less than 620. According to a recent study by FICO, the leading credit score provider, at least 43.4 million people could be classified as having “bad” credit following this recession. Realizing that you are not alone in having bad credit (though it may feel like it) is the first step, but you must also acknowledge that there are no quick fixes to this situation. Credit can only be improved through consistent responsible activity, so be wary of offers that promise miracles.

A history of bad credit can make a consumer feel as if he or she is drowning. Like a swimmer who sinks beneath the ocean’s surface and makes strong, consistent strokes to bring his or her head above water, a consumer needs to consistently add positive information to a credit report in order to mitigate past negatives and improve his or her credit score.

The first thing you should do before applying for a loan is go to AnnualCreditReport.com and get your credit report from all three credit bureaus to make sure that there is no inaccurate information that could be damaging your credit score. Everyone is entitled to a free credit report from each bureau every 12 months. You want to be sure to check all three because, although it is a good sign that one of them is accurate, there can be discrepancies so don’t assume that they will be the same.

The next thing you should do is maximize the positive information that is consistently being reported to the credit bureaus (and therefore on your credit report). If there is negative information on your credit report, unfortunately it is not under your control to remove it. Negative information will be removed from your credit report automatically 7-10 years after it was first reported. If this is your situation, it is even more important to increase the flow of positive information in order to dilute the negative.

Your credit score is calculated from a lot of different credit data in your credit report, so there is no formula that guarantees your score will go up in any specified period of time. The factors that affect your credit score include things like your payment history, the length of your credit history, the amount of debt you have, and the percentage of credit you use in relation to the amount of credit that is available to you.

Before you can start working on improving the information that affects your credit score, you need to make sure that no new negative information is being reported on your credit report. For example, you don’t want to have an open credit card account on which the lender, on a monthly basis, continues to report you as being delinquent. It’s fine if you have existing negative information on your credit report, but it is important that you cut off any additional negative information from coming in before you can start improving your score.

No.  Making your credit card payments by the due date is what will affect your credit score.  There are no benefits associated with making early payments.  However, making your payment well before the due date on your credit card statement is a great habit to practice.  Waiting until the last minute to make your payment can sometimes cause it to be marked as late.  This can be attributed to the time it takes to process your payment as well as other factors.
The three things that most impact your credit score and that are most important to keep in mind are timeliness of your payments, the length of your relationships with your lenders and the percentage of the credit that’s been extended to you that you are using at any given time.

No, not at all.  Debit cards, sometimes referred to as bank cards, are as widely accepted as credit cards, and transactionally, they work the same way.  However, a debit card is linked to your personal bank account, and as soon as you make a purchase with a debit card the money is immediately withdrawn from the account associated with it.  Because of this, there is no bill at the end of the month for the purchases made with a debit card – just an itemized statement.  Debit cards were created for convenience, but they have no more an effect on your credit than would writing a check.

Alternatively, when you make a purchase with a credit card, you are simply lowering your amount of available credit, and you will receive a bill at the end of the month for which you are responsible.

There is no standard number that your credit score will go up each month if you have a secured credit card or line of credit of any other kind.  There are a wide number of factors that determine your credit score and these factors are all based on your behavior and not on what type of or how many credit cards your have.  Plus your credit score is calculated based on your overall credit history, not just the activity on one account.
A secured credit card works just like any other credit card, expect for the deposit that’s required to open the account.  If you are opening a secured card account because you have no credit or bad credit, then you should see an improvement in your credit score, provided that you manage your secured account responsibly by paying your bill on time each month and being careful not to go over your credit limit.
Following these rules will lead to an improvement in your credit score.  However, if you mismanage a secured credit card account by going over the limit and/or not paying your bills on time, then your credit score will drop, just as it would if you did this with a traditional credit card.

Whether you use your credit card each month and then pay your balance in full or choose not to use it at all, the account associated with this card will be reported to the credit bureaus as being current and in good standing.   The first approach will teach you how to manage credit responsibly but requires more discipline than does not using your credit card at all.   The difference between these two approaches as they affect your credit score is marginal so do what’s best for you.

Before you close an account associated with an unused credit card there are two things you should consider.  The first is how closing that account will affect the amount of unused and available credit you have and the second is how long that account has been open.

Closing an account associated with an unused credit card might hurt your credit score if it significantly affects your debt to credit line ratio.  Your debt to credit line ratio is the sum of the total amount of debt that you have measured against the sum of your available credit across all of your credit card accounts.  The debt to credit line ratio is one of the factors that determines your credit score – the lower this ratio the better.  So in layman’s terms, closing an account that significantly increases your debt to credit line ratio will negatively impact your credit score.

It may, depending on how much you lower your credit limit.  Lowering your credit limit affects your debt to credit line ratio, which represents the amount of credit card debt you have accumulated against the amount of credit that’s been extended to you across all of your credit cards.  A rule of thumb is that this ratio should be kept under 60 percent.  In short, this means that if you have $5,000 in open balances and a line of $10,000 in available credit across all of your credit cards, lowering the limit on one of your cards by $3,000 dollars would negatively affect your credit score even if the balance on that card was zero.  This is because your new debt to credit line ratio under this equation would be $5,000 / $7,000, which will translate to well over 60 percent.  If the balance on the card in question is zero, then you have no reason to lower your credit limit.  The more unused credit you have, the less desperate you look to future lenders.  If you are worried about being tempted to spend too much money, then give the card to someone you trust or even throw away the plastic after you note down your account number.

It depends.  Going over the limit on your credit card account affects your debt to credit line ratio, which represents the amount of credit card debt you have accumulated against the amount of credit that’s been extended to you across all of your credit cards. The debt to credit line ratio is calculated each time a billing cycle for any of the credit cards you have closes.  If you went over-the-limit on your card and paid down your balance before the billing cycle ended, then the high balance won’t be taken into account at all.  If the balance still stands at the close of the billing cycle, it will be used to calculate your new debt to credit line ratio, but it might not make much difference depending on how much available credit you have across all of your other credit cards.   A rule of thumb is that this ratio should be kept under 60 percent.

Finally, keep in mind that regardless of what happens with your credit score, you will be assessed an over the limit fee for exceeding your credit limit.   This fee can be as much as $39 dollars.

No; not at all.  Late payments are not reported to the three major credit bureaus until they are 30 days or more past due.  It is at this point that your credit can begin to be negatively affected, but not before.  Even though making a payment a few hours late doesn’t have any real adverse effects, it’s best not to make a habit of this.  You should keep note of when your credit card payments are due and make your credit card company receives at least the minimum payment on or before the due date.   Also remember that, regardless of how late you are – even if it’s only two hours – you will be assessed a late fee.

Not necessarily.  If you have any bills that you’ve been late making payments on – bring those bills back to current immediately.  Banks care about two things.  The first being your ability to pay your bills on time over an extended period of time.  The second is that you have not maxed out your credit cards, because this shows you are desperate for credit.  As a rule of thumb, try to make sure that you are using below 60 percent of the limit extended to you across all of your credit card accounts.  Meaning, if you have a combined credit line of $10,000, limit your spending to $6,000 or less.  If you’ve been practicing this rule and paying your bills on time, you should have a good credit score, and shouldn’t have any problems securing a home loan.  But before you apply, it’s a good idea to get a copy of your credit report to ensure it matches your expectations.

No.  Not at all.  This is actually a very good thing for both you and your credit.  If you have a credit card and you choose not to use it, it will affect your credit score positively.  Even if you don’t use your card, your account will still be reported to the credit bureaus every month as being in good standing.

Paying off your credit cards and loans is not the answer to improving your credit score.  While it is important to keep paying off your debts in full as your end goal, the key to a good credit score is paying your bills on time – all of the time.  A combination of secured and unsecured loans actually looks good on your credit report, given that they’ve been handled responsibly.  Even after you pay off all of your credit cards, keeping the account open with a zero balance will help improve your credit score.

Since you intend on paying it off, don’t over analyze this.  Make the purchase for your friend as you’ve planned.  If you are sure she’s good for the money, and have the funds in hand on the day you make this purchase, you will be fine.  What gets reported to the credit bureaus is your balance on the last day of your billing cycle.  As long as you bring down your balance before then, there will be no indication that you made a large purchase.

One denied credit card application won’t affect your credit score much, but if you apply for a number of credit cards or loans in a short period of time them, your credit score will drop.  If you have a large number of inquiries on your credit history, yes your future applications will be affected.  When potential creditors notice a large number of inquiries on your credit report it makes them think that you are desperate for credit.  Your best bet is to apply for a secured credit card.  You’re guaranteed approval, and you’ll be required to make a security deposit – minimum $200.  You can use a secured card to build up your credit history.  If you have any debts that caused your initial application to be denied, use this time to pay them off, which will also help your credit.  After you’ve had the secured credit card for sometime, check your credit score.  Once it’s above 660 or 680 try applying for an unsecured credit card again.

When you choose debt settlement, you withhold payments from your credit card companies, intentionally defaulting on your account, if you have not already done so.  By doing this, you hope that at some point your credit card issuers will be willing to settle for much less than what you currently owe them, at which point you will need to be able to offer them a large lump-sum payment.  You can do this on your own or hire a Debt Settlement Agency to guide you through the process.  It can absolve your debts, but if you haven’t already defaulted on your credit card, doing so will seriously damage your credit score and there’s no guarantee that your credit card companies will be willing to settle.  If you have already defaulted, debt settlement will not affect your credit score any further.

Banks want to see how you have handled significant amounts of credit over an extended period of time.   If an unsecured line of credit makes you nervous, your best bet is to get a secured credit card.  If you don’t have any credit cards or loans of other types, you have no credit history, which will seriously hurt you if you ever need to apply for a credit card, mortgage or auto loan in the future.  A secured credit card will help you build credit history with low risk to you.  With a secured credit card, your line of available credit can be as little or as much as you choose.  Usually starting around $200 dollars, a deposit is required to open a secured credit card, and you can add to your available balance at any time.  This raises your credit limit and looks favorable on your credit report.  However keep in mind that going over the limit or being delinquent on your payments with a secured credit card will negatively affect your credit history and score.  A secured credit card can act as a personal savings account while building your credit history at the same time, but responsibility while using a secured or unsecured card is the key to a good credit score and history.