Understanding the Basics of Your Credit Reports
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By: Brooke Niemeyer
Your credit report offers a snapshot of your financial health to anyone who reviews it, and that can be a lot of people, from cell phone providers and potential employers to lenders and credit card issuers. With so much importance placed on these reports, it’s important to understand what’s on them.
There Are Multiple Credit Reports & Credit Scores
First, you should know there are different credit scoring models and credit reports, and there’s good reason for that.
“One of the main reasons that different credit scoring models exist is to serve the different needs of lenders,” according to Bruce McClary, vice president of communications for the National Foundation for Credit Counseling. “Credit card issuers, mortgage lenders and auto-finance companies have different criteria they use to make their lending decisions.”
No matter which report you’re looking at, you’re going to see scores that show how your credit ranks.
5 Main Elements of Your Credit Scores
The data you see on your credit report is what the credit bureau uses to calculate your credit scores. Your scores are determined by the following five core factors:
Payment History (35% of your score): This is exactly what it sounds like: the record of whether you pay your bills on time or not. A late payment or two won’t tank your scores, but it will still ding them.
Debt Usage (30% of your score): The amount of debt you carry is the second largest influencer, but before you decide you need to be entirely debt-free to have credit, you should know that having some debt can be a good thing. Credit experts suggest keeping the amount of debt you owe below at least 30%, and ideally 10%, of your total available credit line.
Age of Credit Accounts (15% of your score): Here, the bureaus look at how long you’ve had credit accounts. This is the category you have the least control over, so all you can do to improve it is give it time.
Types of Accounts (10% of your score): This category considers the mix of credit you carry, as there are two main types: revolving credit, or accounts with a different payment each month based on a balance, like credit cards, and installment accounts, or accounts with a fixed payment over a given span of time, like student loans or a mortgage. There is no ideal mix of credit, but having a variety of accounts can help show you know how to manage different types of debt.
Number Inquiries on Your Credit (10% of your score): This reveals how often you’re looking for a new line of credit or loan.
Based on how you perform in each category, the bureau will give you an overall score. This three-digit number is what credit card issuers and lenders look at to determine whether it’s risky to give you a loan or line of credit. The higher the score, the less risky you are (and the higher the amount of money or line of credit for which you’ll qualify).
So how do you get to that great or excellent credit goal? We could get really technical and go over the math and strategy involved, but let’s keep it simple: It all comes down to being financially responsible.
“Despite the mathematical algorithms behind each credit rating, achieving a healthy credit score can be based on a simple set of financial practices,” McClary said. “Those who pay their debts on time, keep balances under control and check credit regularly are most likely to be on their way to a strong credit score.”
How Do I Check My Reports & Scores?
You are entitled to one free copy of your credit reports every 12 months. You can get yours by visiting AnnualCreditReport.com. As part of your financial wellness plan, it’s a good idea to check your scores on a regular basis (you can see two of your credit scores for free any time on Credit.com).
“Checking credit regularly can help identify ways to improve debt management and can also help you take fast action when spotting credit fraud, identity theft and costly reporting errors,” McClary said.
If you get copies of your reports and see something that is entirely inaccurate, you’ll want to file a dispute with the credit agencies (you can read more about how to do that here). Make sure you file one with each agency that reported inaccurate information, as they don’t share data with each other.
Brooke Niemeyer is the Deputy Managing Editor – Syndication for Credit.com. She writes about a variety of personal finance topics, with work featured on CBS, TIME, The Huffington Post, MSN, FOX Business, Business Insider, Yahoo Finance and other publications. She has a Master’s degree in Journalism from New York University and was a reporter for NBC before joining the Credit.com team. You can follow her at @RNYBrooke.