How to read a credit report
What is a credit score?
Your credit score is a grade assigned to your credit history that expresses your creditworthiness as a single number. Higher credit scores mean you’re less of a risk, which means you are more likely to be able to borrow larger amounts at lower interest rates. Lower credit scores mean you’re higher risk, and are therefore more likely to be offered lower amounts at higher interest rates or be denied credit altogether.
The most commonly used credit scores are provided by Fair Isaac Corporation and are known as FICO® scores. They can range from 300 (the worst) to 850 (the best). Creditors differ, but a good score is usually considered to be 700 or above.
What is a credit report?
The three major credit bureaus—Experian, Equifax and TransUnion—collect information from public records and companies you do business with. They use that information to create a record (your credit report) that includes:
- Personal information to identify you, including name, current and previous addresses and Social Security number
- A list of your credit accounts, including reports from creditors
- Public record information and information from collection agencies, including delinquent accounts, bankruptcies, foreclosures, lawsuits, wage attachments, liens and judgments
- Credit inquiries (a list of everyone who has asked to see your report in the past two years)
All of the above financial information factors into your credit score.
What else should I know about my credit score?
Five key items on your credit report are calculated to create your credit score, but they don’t factor into the overall score equally. Some items in your credit report have more weight than others. Here’s the breakdown:
- Payment history (35%) Timely payments on all your accounts can help you get a higher score. The score is lowered for late payments, delinquent or overlimit accounts, bankruptcies and liens.
- Total amount you owe (30%) This is the ratio of what you owe to the amount of your available credit, or your debt-to-credit ratio. A high credit card balance can lower your credit score as it may reflect difficulty affording your monthly payments. However, if you have a high credit limit and you keep your balances low, your debt-to-credit ratio will be low, so a higher credit limit can help you protect your good credit score. But this is only the case if you continue to keep your balances low.
- Length of credit history (15%) This shows how long you’ve been using credit and how well (or poorly) you’ve managed your finances in the past.
- New credit accounts and inquiries (10%) This includes accounts you’ve opened recently, and recent inquiries from companies you’ve applied to for credit. Be aware that applying for too much credit can lower your score.
- Types of credit in use (10%) This includes all your credit accounts — credit cards, installment loans, mortgages and other types credit.
You may have a different FICO score for each of the credit bureau agencies. That is, each bureau uses their own formula when calculating the FICO score. Since all the bureaus use your credit report to perform their calculations, the different FICO scores are usually very similar.
Can I review my credit report?
Experts recommend that you review your credit report annually for accuracy. If you find any errors, report them to the credit bureaus—and to the originating creditor—to have them corrected. And if you think fraud or identity theft has occurred, contact the credit bureaus immediately. The Fair Credit Reporting Act (FCRA) requires that each of the reporting agencies provide you access to a free credit report. Here’s how:
1. Once a year, you are entitled to a free credit report from each of the three credit bureaus.
2. If your application for a credit card is denied, the credit bureau that reported your credit score must offer you a free report.
Can I improve my credit score?
The best things you can do to keep your credit score up is to pay your bills on time, and limit your debt payments to less than 20% of your income.
Your credit report and credit score tell creditors how you manage money. Make sure that you make the grade by staying on top of both.
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