by Tiffany Davis
A credit report is a record of your financial history. It is a modern day measure of your reputation or “credit worthiness”. It is used by lenders to determine how likely you are to pay back the money you have borrowed. When you make a payment on a credit card or loan, the company that gave you the loan or credit keeps a record of how much and often you pay. Those companies and other sources also report your credit, loan and payment history to one or more credit reporting companies. The three credit bureaus are Equifax, TransUnion and Experian. Because of federal law, you can check each of these reports for free one time per year at annualcreditreport.com.
The FICO® Score is computed using software created by Fair Isaac and Company which is another tool used by lenders to determine how much money you can borrow and how much interest you’ll pay. You have 1 score from each of the 3 major credit bureaus and a combination of the information is what most lenders use to determine your credit risk and is used in more than 90% of lending decisions. FICO scores range from 300 to 850 and the higher the better. A credit score of 720 will often qualify you for the best rate on a loan.
Payment History- This includes paying your bills on time and has the biggest effect on your credit score. Late payments will stay on your credit for 7 years but will have the biggest impact on your score in the first 24 months.
Amounts Owed- This considers your debt to credit ratio which is calculated by adding all of your debt on revolving credit lines (credit cards, store cards, overdraft lines of credit and home equity lines of credit) divided by the amount of revolving credit available to you. Try to keep your debt to credit ratio below 25% and the balance of each account below 25% of your available credit.
Length of Credit History- A long credit history will generally help your score. This factors how long accounts have been open (including your oldest account) and also averages the age of all your accounts. Opening too many new revolving accounts in a short period of time can hurt your score as well as closing an older account.
New Credit- Having a recently opened account can help your credit score but multiple inquiries for credit in a short period of time can hurt your score. Multiple auto and mortgage loan inquiries (common when shopping around for the best rate) will generally count as one inquiry if completed within 30 days. Credit Inquiries will only affect your FICO score for 12 months but can remain on your credit report for 2 years.
Types of Credit- This considers your mix of credit cards, retail accounts, student and car loans, and mortgages. Having credit cards and installment loans with a good credit history will raise your score. Not having credit cards can make you appear riskier to lenders than someone who manages their credit cards responsibly. This is only 10% of your score but will be more important if your credit report does not have a lot of other information to base your score on.
–You can check each of your credit reports from the 3 bureaus for free once a year at annualcreditreport.com. Pull one report from each bureau every four months to check for inaccurate information or to see if anyone is using your personal identifying information.
–Checking your own credit report is considered a “soft inquiry” and will not affect your credit score as long as you request it from annualcreditreport.com or another company authorized to provide credit reports to consumers. Hard inquiries are when prospective lenders or businesses pull your credit to offer you goods and services (like a credit card) and these inquiries can hurt your credit score.
–If you find inaccurate information, tell the credit reporting company in writing. If you are a victim of fraud, call the three major bureaus to play a “fraud alert” your credit reports.
–A closed account will still show up your credit report and closing an account can hurt your credit score. Paying off an account in collections will not remove a late payment from your credit score and can stay on your credit for 7 years.
–Late payments on utilities can hurt your score if the servicers report to credit agencies and late payments can also cause creditors to raise interest rates. If your payments are late get current stay current. Set up reminders to help you pay on time or set up automatic payments.