Understanding Credit Reports and Credit Scores

Outside of the amount of actual greenbacks you have in your bank accounts, your credit is the cornerstone of your financial health and future. Strong credit enables you to qualify for low interest rate loans that can assist you in purchasing a home, car and other items. Poor credit is akin to having a fifty-pound weight attached to your ankle possibly hindering your chances to buy a home, finance a car, secure insurance and subjecting you to credit cards with high interest rates. Lenders use a three-digit number to determine the health of your credit. That three-digit number is your credit score.

What is your credit score?

Your three-digit score generally ranges between 300 to 850.  Your score tells lenders if you’re considered a credit risk, or if you’re diligent in paying your bills on time.  A credit score ranging from  580 to 669 is considered fair, 670 to 739 is considered good, 740 to 799 is very good and 800 and up is excellent. If your credit is below 580, this means you have some work to do. 

Your credit scores are calculated using content from your credit report. There are three major nationwide credit reporting agencies – Equifax, Experian and TransUnion. Each of them uses a different method when determining your score. Also, credit information, such as from your credit cards, is updated at different times. There are many scoring models, the most well-known are FICO Score and VantageScore. These two are what most lenders use to qualify you for credit.

What are the factors that determine your credit score?

The components that create your credit score are called credit score factors. The major ones include:

  • Your total debt
  • Types of credit
  • Payment history
  • Age of credit history
  • New credit

These factors can indicate which element of your credit history is having the greatest impact on your credit score and what you should focus on should you need to make yourself more creditworthy. 

Your payment history factors for 35%, the total amount owed, aka credit utilization, factors for 30%, the length of credit history factors for 15%, and new credit factors for 10%. 

Another component that affects your credit score is if you have had a recent hard or soft inquiry into your credit history. A hard inquiry happens when a financial institution such as a bank, credit card, car dealership or mortgage lender accesses your credit report because you’re applying for credit. A soft inquiry happens when someone accesses your credit report, but you’re not applying for new credit. Soft inquiries include inquiries from landlords, employers or others looking to perform background checks.  Soft inquiries are not reflected in your credit score, whereas hard inquiries are.

What is a credit report?

A credit report is a summary of your credit history and other information that has been reported to credit bureaus by lenders and creditors. Information on your credit report includes:

    • Identifying Information. This is your name, address, social security number and date of birth.
    • Credit accounts. This includes credit cards, car loans, student loans and mortgages, as well as the date the account was opened, the credit limit or loan amount, the account balance and payment history.
  • Credit inquiries. This includes hard and soft inquiries.
  • Bankruptcies and collection information. Bankruptcies and past-due accounts that have been turned over to a collection agency. This also includes cable accounts, doctors and hospital bills.  

The information that comprises your credit report will remain on the report for a length of time. Negative information, such as late payments and collections, stays on your report for around seven years. Bankruptcies can remain for 10 to 12 years, depending on the type of bankruptcy.  Positive information stays on your credit report for up to 10 years as long as you keep the account open.

You can also obtain a free copy of your credit report every 12 months from each of the major crediting bureaus.

Ways to improve your credit score

The information that appears on your credit report affects your credit score and overall creditworthiness. Here are a few ways to ensure your credit is as healthy as it can be. 

  • Pay your bills on time. Six months of on-time payments will enable you to see a difference in your score.
  • Don’t close a credit account. Even if you’re not using the card, sometimes closing credit card accounts can negatively impact your credit utilization rate, especially if your debt may be a bit high.
  • Review your credit report annually and dispute any errors on your report. If you see an error, follow the steps to dispute it. You should also dispute the errors to Equifax, Experian and TransUnion either online or via phone or snail mail.
  • Up your credit line. If you’re in good standing with your credit card accounts, ask for an increase as this can positively impact your credit utilization rate, as long as the increase remains unused.

Strong credit can give you the ability and flexibility to achieve financial goals and life milestones with ease. The beginning of having strong credit health is knowing your credit score and what is lingering on your credit report. Staying diligent with the lines of credit you currently have will enable your credit to remain strong and empower you as a confident borrower.

Click here to see credit card options for poor credit.


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