Understanding Your Credit Report
As anyone who has ever applied for a line of credit knows, to purchase a car, house, boat, or even applying for a credit card, means that lenders must know how likely you are to repay your debt. Lenders achieve this by thoroughly inspecting your credit report, which reflects your credit management in the past.
What do lenders see when viewing your credit report?
Most often lenders will use the three major credit bureaus – Experian, Equifax, and TransUnion, to analyze your credit history, and while each of these reporting agencies may differ in how the information contained in their reports is presented, they each detail the following information:
(i) Identification Information – This ensures that you are the person who is actually applying for the line of credit by identifying your full name, date of birth, current place of residence, and your social security number.
(ii) Public Records – Creditors can identify any prior negative financial activity through viewing public records on foreclosures, bankruptcies, and other liens.
(iii) Credit Accounts – This is a list of your both your current and past credit accounts. Information viewed in this section includes the date the account was opened, a classification of the type of credit for each account, the credit limit each account is allowed, each account’s balance, and of course your payment history.
(iv) Inquiries – Every time you apply for credit the lender will view your credit report, this is referred to as an inquiry. An inquiry is not recorded when you request your own credit report.
What does your credit score mean to lenders?
As many of you are well aware, the higher your credit score the more likely you are to receive a line of credit, this is because it is perceived that you are more likely to repay the debt. But that’s not the extent of your score. A higher credit score will also permit a higher lending amount, plus lower interest rates. Scores will usually range between 300 and 900.
What can positively, or negatively, affect your credit score?
There are five key areas that you want to be familiarized with for knowing what can affect your credit score.
(i) Your Payment History – It is vital that you make your minimum payments, when they are due, as your payment history makes up approximately 35% of your credit score. A solid history of making payments on-time will help boost your score; while late payments, a bankruptcy, or any other negative activity can damage your credit.
(ii) The Amount You Owe – Several factors are taken into consideration when viewing your outstanding balances. These factors include the number of accounts that have outstanding balances, the amount of available credit on each account, and the amount of the outstanding balance. A rule of thumb is that the less money you owe, in comparison to your credit limit, the lower your credit score will be. Maintaining a 30 – 40% balance on your lines of credit is recommended by lending experts. The amount you owe consists of approximately 30% of your overall credit score.
(iii) The Length of Your Credit History – Basically, the longer you’ve had lines of credit in good standing, the higher your credit score. But you don’t necessarily have to have an extensive credit history to achieve a higher score, you can have a short credit history and have a high credit score, so long as you have demonstrated responsible credit management. The length of your credit history makes up approximately 15% of your credit score.
(iv) New Lines of Credit – New credit items constitutes approximately 10% of your credit score. Your recent credit accounts are weighed against your prior credit history. As mentioned previously, inquiries negatively affect score. So, if shopping for home financing or a car loan, it is recommended that you do so within a 30-day window, in order to reduce the long-term effects that inquiries can have on your overall score.
(v) Miscellaneous Factors – There are several other factors that make up the remaining 10% of your credit score. Positive influences include having a wide variety of the types of credit accounts on your report, as those with lengthy credit histories would be expected to have credit cards, installment loans – a mortgage or car loan, and personal lines of credit is considered normal and can slightly boost your credit score.
References:
Much of the information provided above is gathered from GMAC Mortgage and FICO® Quarterly Monitoring
Resources:
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I agree maintain a 30% to 40% credit utilization will get you a good credit score. Those individuals that have an excellent credit score usually are around 10% to 15%. This will help you get an even better interest rate.
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Thanks for the post because It’s very important to understand the credit report. It’s even more important than credit score. Because when lenders want to loan someone, they ultimately look at his/her credit report. Credit score is just for a quick look so having a clean credit report certainly helps in a getting good rate and terms on any kind of a loan.
I honestly think they put more than 30% weight on the amount you owe ratio. I’ve found its impossible to pass a fico score of 740 if the debt ratio is above 50%.
It is time to restore your credit score when you begin to find it tough to get your credit applications approved. In truth, the best thing that you would have done is attempting to maintain a good credit rating. But if you end up with a low credit score, it is not the destruction of the world. There are ways in which you may yet be able to fix it up. But doing so would take a lot of effort and may take some time.
A person’s fiscal account is the best means for lenders to verify if an applicant is a suited candidate for a loan. Creditors don’t wish to chance rendering a lot of money to someone who is unlikely to repay their debt.
This article makes it clear why we should understand a credit report. Getting credit report is very easy but we have to understand why it is important and why the lender is interested in it. Thanks for the nice article.
Yes, we have to always be aware of our own credit scores or credit standing because lenders and financing companies base your capability of paying through those records. Just remember to get your credit reports from trusted companies.