It is surprising that with so many areas of your life that be affected by credit reports and FICO scores, many people still don’t understand what they really are. Here is a quick breakdown of what a credit report is as well as what a FICO score is. This information will prove very useful next time you try to get a loan, credit card, or and even a job.
A credit report is simply an report that has compiled all of your previous credit history, bill paying history, as well as a picture of your current financial situation related to your debt and debt paying practices. It will include how much credit you have available to you, your monthly debts, etc
Credit reports are not designed to tell lender whether or not you are a high or low risk person to lend money to, but rather provides them with facts about your history and current situation in order for them to make a decision for themselves. This information is collect by credit bureaus, also known as credit reporting agencies, such as Equifax, Experian, and TransUnion. Since these agencies do not share information with each other, it is always a good idea to do a side-by-side comparison of your three credit reports.
Your credit reports will be looked at by in a variety of situations including when you apply for a credit card in your name, apply for student loans, mortgages, and car loans. It is estimated that 35% of employers will check your credit reports in order to determine how responsible you are with money, this is normally only done by employers that will hire you to handle money or are part of the financial industry.
In most cases, lenders will use your credit report in order to get your FICO score. A FICO score is essentially a formula that is used to give creditors an easy way to determine your credit worthiness. Your FICO score will range from 300 to 850, the higher the score the better. Many people argue that you need to keep your FICO score at 680 or above. The formula that creates the FICO score is based upon five distinct factors. These factors can be both positive or negative depending on your financial history.
- Payment History
Your payment history includes variables like payment status on specific types of accounts, presence of adverse public records, delinquency, number of past due items, and number of accounts that have been paid as agreed.
Positive Factors – Your payment history will look good if you make your monthly bill payments on time, do not have any delinquent debt, and pay off all debt within the specified time frame that was set.
Negative Factors – Your payment history will suffer if you are constantly making your payments late, even by a few days, have multiple delinquent accounts, and have adverse public records like bankruptcies, liens, wage garnishments, etc
- Amounts Owed
Amounts owed targets your current debt. It will include information like the total amount owed on an account (such as a student loan or mortgage), total number of accounts with current balances, percentage of your credit line that is available, and amount of money still owed on installment accounts.
Positive Factors – The goal of this area is to determine how much credit you have available compared to the amount of debt you currently owe. The more credit you have available, the better your FICO score will be.
Negative Factors – There are several situations that can quickly lower your FICO score. The most common is that your credit is exceeded by your debt. This is often the case for students just getting out of school and individuals that have multiple mortgages on their homes.
Length of Credit History
This portion of the FICO score is fairly straightforward. It looks at how long you have had account open and how much recent activity there has been.
Positive Factors – The longer your accounts are open, the better it looks to new lenders. This is because it shows them that you could become a long-term customer. It also looks good if there is at least some activity on your lines of credit. If you have 10 credit cards, then try to charge at least one item a month to each card. This makes it look like you utilize all of your credit options.
Negative Factors – Having no accounts open, or only having recent accounts. It is always difficult for a lender to consider your credit worthiness if they have no previous history to go on. It also doesn’t look good if you only keep your credit accounts open for short periods of time. Why should a lender consider extending you a line of credit, if you are only going to use it for a few months.
Types of Credit Used
This area is essentially a snapshot that tells lenders all of the types of credit you have used such as credit cards, retail accounts, installment loans, mortgages, etc
Positive Factors – It is best to have a variety of different types of credit usage in your history. It tells lenders that you know how to balance your credit usage, even with multiple accounts in use at the same time.
Negative Factors – If you have only had credit cards in the past, it can be risky for a lender to give you a large loan. Just because you can pay off your credit card balance every month, doesn’t mean that you can make a consistent payment on a loan. This is especially true if some months you barely use your credit card (maybe because you know that you don’t have the money to pay of a high bill at the end of the month), while other months you max out your limit.
It is important to keep in mind that your FICO score is combination of all of these factors and no single factor can determine your score. It is also important to consider that your FICO score is based on both positive and negative factors, which means that just because you have some negative factors, doesn’t mean your score has to be poor.
Remember, your FICO score is based upon the information in your credit reports. In order to stay informed about your credit reports and FICO score it is a good idea to have unlimited access to your credit report. Some people check their credit reports once a year or less, but that means they do not know what their FICO score is for more than a few days out of the year. In order to stay ahead the curve, it is best to get automatic updates that alert you to important changes in your credit report. Not only do you stay informed about your FICO score, but it can also alert you to potential identity theft or reporting errors.
With so much emphasis placed on FICO scores and credit reports from lenders, potential employers, credit card companies, etc., it is important to stay alert and up to date about your credit reports. The best way to do this is to have unlimited access to your reports as well as have a third party keeping an eye of things with you. That way they can send out automatic notifications about changes that you could have missed on your own.
