Your credit report holds the summary of your credit history and your credit score. If you have used a credit card or taken out a personal loan, then you have a credit history. Whenever you apply for any loan or borrow money, lenders use your credit report as part of their decision-making process. Your credit score is based on the information listed on your credit report. Understanding your credit report and how your score is calculated will give you better insight into how lenders evaluate your credit worthiness.
Your credit score is based on the information listed on your credit report. Understanding your credit report and how your score is calculated will give you better insight into how lenders evaluate your credit worthiness.
What’s In Your Credit Report
Identifying Information – This includes all of your information such as name, date of birth, social security number, address, and employment information.
Credit Inquiries – Anytime you apply for a new loan, the lender will pull a copy of your credit report. This section contains a list of who has accessed your credit report within the last two years. It’s then broken down into voluntary and involuntary inquiries (also known as hard and soft pulls). A voluntary inquiry is when you give permission for a company to review your report when you are applying for a loan, employment, etc. An involuntary inquiry is when a company has viewed your credit report to pre-qualify you for a loan product, such as a credit card.
Trade Lines – This is a list of the open and closed credit accounts you have. Each of these accounts contains the lender’s name, type of credit (credit card, auto loan, mortgage, etc.), the open date, loan amount or credit limit, account balance, and payment history.
Public Records and Collections – Public record information in this section describes if you have ever had bankruptcies, liens, garnishments, foreclosures, or legal judgments. Any accounts which are in a collection status are also listed, along with the amounts owed.
Alert Information – This section shows any possible fraud alerts and unique information. If you are or suspect you may be, a victim of fraud or identity theft, you can place a fraud alert on your credit report to alert potential creditors or lenders.
How Your Credit Score Is Calculated
Your credit score is a three-digit number that is evaluated by using a mathematical formula and is displayed on your credit report. Points are given or taken away based on how you manage your credit accounts. Not all scores are created equal. Each credit reporting agency has their magic formula for calculating credit scores. The most common criteria used in calculating your credit score is payment history, total amounts owed, the length of credit history, credit mix in use, and new accounts opened.
How your Fico® credit score is calculated.
Your payment history is a record which shows if you have been paying your bills on time. Lenders report your current payment status monthly, indicating your current payment status with them. Normally, this is the category which has the biggest impact on your credit score. Payment history is critical to keep in good standing since it makes up roughly one-third of your overall score. The good news is, gaining the maximum benefit from this category is easy; pay your bills on time. If you have negative history in this category, bring all accounts back into good standing, and make your payments on time. Your score will rebound and you will be on your way to a better credit score.
Total Amounts Owed
Your total amounts-owed has a large impact on your credit score, making up almost one-third of your total score. Calculating this is easy, total up all of the amounts owed on your credit report and compare it to your total credit limit. Having high balances close to your credit limit will affect your score negatively. Keeping these balances low maximizes the positive impact this category has on your credit score.
Length of Credit History
This can be easily summed up as how long or short an account has been open and active. An average of your account lengths is used for this calculation. Generally, the longer an account has been open, the better it affects your score. Keeping an account open, even after the balance has been paid off, is a good idea. Having no balance, but an open account also helps keep your total amounts owed ratio lower. While this category is important, it does have less of an impact than payment history and total dollar amount owed.
Having a combination of different types of credit accounts affects your credit score. Types of credit include credit cards, auto loans, retail accounts, lines of credit, and mortgages. However, it is not necessary to have one of each type. Credit mix has a relatively small impact on your score. Only open accounts you intend to use and make your payments on time to maximize this category.
New Accounts Opened
New accounts tie into your length of credit history. Opening new accounts bring down your total account age, which can negatively affect your score. Lenders can also view this as a greater risk when making their decisions. While the impact on your credit score is low, it’s best to avoid opening several new accounts in a short period of time.
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