Your credit report is a snapshot of your financial health. It gives lenders a general idea of how you handle debt and cash flow. Just about everything related to your financial life is a part of your credit report. Lenders use this information to determine whether they will extend credit to you and how much that credit will cost.
Understanding how to read your credit report is paramount to improving or maintaining it. There are four main components to your credit report. Some of that data is then used to determine your credit score.
Parts of a credit report
While each credit reporting agency uses their own reporting format, the general categories on your credit report remain the same. The four main parts of your credit report include your:
• Identifying information
• Trade lines
• Public records and collections
• Credit inquiries
Your identifying information does not impact your credit score, although it is important to ensure the information is accurate. This includes your name, address, social security number and general employment history.
Trade lines on your credit report refer to credit accounts such as car loans, credit cards and mortgages. These accounts directly impact your credit score, as do public records and collections. Public records include bankruptcies, liens and foreclosures. Collections records could include delinquent debts.
Credit inquiries make up the last part of your credit record. They occur when a lender reviews your credit history because you have applied for some type of credit or loan. While these hard inquiries remain on your credit report for 24 months, they only impact your credit score for the first 12 months.
FICO® credit scores are calculated using the data on your credit report. While the exact calculation is a closely guarded secret, the five categories used and how much they contribute to your score are not. Here is a breakdown of the general information and how much each category contributes to your FICO® score.
Payment history 35%
Debt ratio 30%
Length of time 15%
Types of credit 10%
New accounts 10%
Your payment history is one of the most important contributing elements to your FICO® score. It shows lenders how responsibly you handle cash flow. Lenders use your payment history to determine how much risk they will assume by extending credit to you and how much that credit will cost.
Your debt ratio is the second biggest contributing factor to your credit score. It is calculated by dividing the amount of debt you have by the total amount of credit available to you. For instance, if your available credit is $10,000 and you are carrying a $4,000 balance, then your debt ratio is 40 percent. Lenders prefer to work with clients who have a debt ratio below 30 percent.
The next 15 percent of your FICO® score comes from the length of time your credit accounts have been open. Older credit accounts in good standing have a more positive impact on your credit score.
The types of credit accounts on your report contribute to 10 percent of your FICO® score. Lenders will look to see if you have revolving accounts, installment loans, retail accounts and mortgages. It isn’t necessary to have each of these accounts on your credit report, but maintaining a mixture of different types of accounts in good standing positively impacts your FICO® score.
New accounts contribute the final 10 percent of your FICO® score. Opening too many credit accounts too quickly represents risk to the lender. New accounts may lower your score, especially if you don’t have an established credit history.
It is essential to review and monitor your credit report regularly. The Federal Trade Commission estimates that one in five people have mistakes on their credit report. This means that over 40 million Americans have inaccurate information on their credit reports, which could be having a negative impact on their score. You must take a proactive approach to ensure the information contained in your credit report is accurate.
If you find errors on your report, you must contact the credit bureau as well as the creditor who supplied the information. They may ask you for documentation before making the correction, but they are bound to correct it under the Fair Credit Reporting Act.
You may also debate the accuracy of an account on your credit report by filing a dispute with the credit bureau. If you find accounts that are unfamiliar, don’t belong to you or are inaccurately reported on your credit record, filing a dispute with the credit bureau will prompt an investigation. You will be required to provide supporting documentation to the credit bureau, who must investigate within 30 days.
How to get a free credit report
Since your credit report is such a big part of your financial health, Gulf Coast Educators is proud to provide members with a free credit report which includes your credit score. A loan officer can discuss your credit report with you and help you find ways to improve and maintain your credit score.