Your credit report is one of the most important parts of your financial life. Without a credit report, you may struggle to get loans to buy a home, open credit cards or even get utility accounts in your name. Your credit report shows your credit history, which lenders use to determine the risk of lending to you.
Here’s what you should know about your credit report, and how to make sure it’s accurate.
What Is a Credit Report?
When opening a credit account or taking out a loan, the creditor keeps a record of the amount of debt, timeliness of the payments and when you pay it. The creditor reports this information to one or more of three credit reporting agencies: Experian, Equifax and TransUnion. The information on the credit report shows potential lenders and other organizations a variety of facts about your financial life, including:
- Your name and address history
- Types of debt you have, such as revolving debt, student loans or mortgages
- How much debt you have in relation to available credit
- Length of time you keep accounts open
- Presence of late or missed payments, or debts that have gone to collections
Most factors stay on your report for two years. If you file for bankruptcy or lose property due to foreclosure, those items will show up on the report longer.
How Do You Use a Credit Report?
When applying for a loan, it’s typical for the lender to check your credit report. You may also need to submit a credit check for new vehicle insurance, apartment applications and more. The organization reviewing the application may look at your detailed credit report, or it could simply check your credit score. It uses this information to determine whether to approve your application.
Although credit reports are intended mostly for lenders, it’s wise to look at your credit reports as well. Getting reports from all three agencies helps you see who is reporting debts in your name, which can be a good way to spot incorrect details or identity theft.
How Often Should You Check a Credit Report?
Generally, plan to get a copy of your credit report at least once a year. Creditors don’t always report to all three agencies, so you need to request a report from each one. You don’t have to pay for this service. Some companies offer the ability to get your full credit report and credit scores a few times a year, in exchange for a monthly or annual fee.
In addition to your yearly review, you may want to check your credit if:
- You’re planning to apply for a loan soon
- You have recently found suspicious charges on your accounts
- You have accumulated or paid off debt since your last report
Reviewing your credit report a few months before applying for a loan gives you more time to correct any errors.
What Is a Credit Score?
A credit score is a three-digit summary of your creditworthiness, according to the reporting agency. Many lenders look at your score to see if it fits their minimum benchmarks for a successful loan application. It’s important to look at your scores from all agencies, as they may differ significantly.
FICO Credit Score Factors and Their Percentages
How Can You Fix Credit Report Errors?
If you notice errors on your credit report, you should write directly to the agency to dispute it. The agencies may have online forms you can complete to dispute the error. The agency has 30 days to contact the company reporting the inaccurate information, get further evidence and provide a resolution. If the dispute is successful, you should request a copy of your credit report in two to three months to confirm the change.
Keeping your credit report as accurate as possible requires regular monitoring and occasional corrections. By investing the time, you can help ensure that your credit report shows the most correct financial picture to prospective lenders. Please read the accompanying resource, by Stein Saks, for further insight on this topic.
A credit score is a number that lenders use to determine the risk of lending money to a given borrower. Credit card companies, auto dealerships and mortgage bankers are three common examples of types of lenders that will check your credit score before deciding how much they are willing to lend you and at what interest rate. Insurance companies, landlords and employers may also look at your credit score to see how financially responsible you are before issuing an insurance policy, renting out an apartment or giving you a job.
In the next lines, we will explore the five biggest elementss that affect your score: what they are, how they affect your credit, and what it all means when you go to apply for a loan. You must know these aspects, even if you hire a credit repair company to help you out.
The Five Elements That Go Into Your Credit Score
Your credit score is a three-digit number generated by a mathematical algorithm using information in your credit report. It is designed to predict risk, specifically, the likelihood that you will become seriously delinquent on your credit obligations in the 24 months after scoring.There are a multitude of credit-scoring models in existence, but there is one that dominates the market: the FICO credit score. FICO scores range from 300 to 850, where a higher number indicates lower risk.A consumer has three FICO scores, one for each credit report provided by the three major credit bureaus: Equifax, Experian and TransUnion. Unfortunately, consumers currently have access to only their Equifax and TransUnion FICO scores.
Data from your credit report goes into five major categories that make up a FICO score:
#1 Payment history (35 percent):
According to FICO, past long-term behavior is used to forecast future long-term behavior.FICO keeps an eye on both revolving loans – such as credit cards – and installment loans, such as mortgages or student loans. Although the weight of each loan varies between individuals, FICO indicates that defaulting on a larger installment loan like a mortgage will damage a credit score more severely than defaulting on a smaller revolving loan. One of the best ways for borrowers to improve their credit score as a whole is by making consistent, timely payments.
#2 2. Amounts owed (30 percent):
The second-most important component of your credit score is how much you owe, because a borrower should maintain low credit card balances. FICO says people with the best scores tend to average about 7 percent credit utilization ratio, but that 10 to 20 percent usage is fine. That rule of thumb applies to each individual credit card as well as the overall level of debt.As you could notice, the first two factors make up nearly two-thirds of your score. So if you pay your bills on time and do not carry big balances, you are two-thirds of the way toward a good credit score.
#3 Length of credit history(15 percent):
It is impossible for a person who is new to credit to have a perfect credit score. A longer credit history provides more information and offers a better picture of long-term financial behavior. Therefore, to improve their credit scores, individuals without a history should begin using credit, and those with credit should maintain long-standing accounts.
#4 Types of credit in use (10 percent):
The final thing the FICO formula considers in determining your credit score is whether you have a mix of different types of credit, such as credit cards, store accounts, instalment loans and mortgages. It also looks at how many total accounts you have.
#5 New credit (10 percent):
Your FICO score considers how many new accounts you have. It looks at how many new accounts you have applied for recently and when the last time you opened a new account was. The score assumes that if you have opened several new accounts recently, you could be a greater credit risk. People tend to open new accounts when they are experiencing cash flow problems or planning to take on lots of new debt.