#credit scores and reports
What is a credit report?
If you have ever opened a credit card account, financed a car or borrowed money from a bank, it s tracked in a credit report, a detailed file about your personal credit history. Credit reports record your loans, credit cards, payments, outstanding debts, and other financial obligations.
Whenever you apply for a loan or credit, lenders use your credit report to decide whether they can trust you to pay back the money you have borrowed.
Your credit report contains:
- Current and previous addresses and employers, social security number, and date of birth
- Public record information including liens, judgments, and bankruptcy filings
- Outstanding debts that have been sent to a collection agency
- A list of your credit accounts and loans including:
Current and past payment information (including late payments)
Current balances on your credit cards
Current amounts of outstanding loans
Your credit report does not contain information about:
- Political party affiliation
- Medical history
- Criminal record
The information in your credit report is supplied by companies that have given you credit or loaned you money. These creditors (such as banks, credit card companies, and department stores) provide regular updates about your credit accounts and loans to credit reporting bureaus. Credit reporting bureaus keep the information in a database, and then provide it to lenders when you apply for a new credit card or loan.
What do lenders look for?
There are several factors in your credit report that lenders may consider when deciding whether to give you a loan or credit account. For example, they may consider how much debt you can handle in relation to your income, your employment history, and your history of paying bills on time.
When you apply for credit, lenders determine how risky it might be to loan you money, and whether you are likely to pay it back on time, by examining your credit score (also known as a FICO score because the scoring system was developed by Fair Isaac And Company).
How is my credit score determined?
Three main credit bureaus Experian, TransUnion, and Equifax collect and keep the data and credit information that is used to calculate individual credit scores.
In calculating credit scores, greater weight is given to some factors over others. According to Fair Issac Corporation s Web site. your credit score is calculated using information about:
- Your history of on-time payments (35 percent)
- The amount of money you owe (30 percent)
- The length of your credit history (10 percent)
- The number of recently opened accounts and inquiries to your credit report (10 percent)
- The types of credit you use (10 percent)
FICO scores range on a scale from 300 to 850 the higher the better. Generally speaking, a credit score that falls below 600 is considered fair to poor and a score of 720 or higher is considered very good to excellent.
A newer scoring system called VantageScore, which was developed by the three credit bureaus, uses a similar formula to FICO. The VantageScore ranges from 501 to 990 and also gives you a letter grade from A to F, like on a school report card.
Watch out for things that can negatively affect your credit score:
- Making late payments or skipping payments. Make it a priority to pay your credit card or loan bills on time, and never miss a payment even if it means you can only make the minimum that month.
- Borrowing more money than you can easily afford to repay. Your credit score is based in large part on how much money you have borrowed. A good rule of thumb is to borrow no more than 30 percent of your income (this includes mortgages, auto loans, credit cards, etc.)
- Too many credit checks (or inquiries ). Your credit score can be affected if you are applying for too many lines of credit at once. Every time a bank or credit card makes an inquiry to your report, it shows up. This tells potential lenders that you might be preparing to borrow money from other places.
Your credit score matters
Your credit score can affect how much money a lender will lend you, and at what interest rate. Even a 50-point difference in your credit score can help you get a better interest rate on a loan, which can save you thousands of dollars over the life of the loan.
It pays to do whatever you can to raise your credit score, especially if you are considering a major purchase down the road like a home or a car.
For more information about FICO and credit scores, visit the FICO Credit Information Center .
Key steps to improving and maintaining your credit score
- Always pay your bills on time.
- Use your credit cards responsibly. Don t let your cards reach or go over their credit limits.
- Make at least the minimum monthly payment on your credit card balance each month and, if you can, try to pay your monthly balance in full.
- If you move, let your creditors know your new address as soon as possible to avoid missing monthly bills or receiving them late.
- If your credit card is lost or stolen, report it immediately.
- Review your credit reports for accuracy at least once a year and report any errors immediately. If you plan to apply for a loan for a major purchase such as a home or a car give yourself time to correct any errors before you apply.
- Establish a consistent work history. Lenders like to see a consistent employment and income.