How To Understand My Credit Report

A credit report is not some mystery document that is completely off limits to most people, though many people feel that way. The truth is everyone has a credit report and understanding it is not a difficult concept to grasp, you just have to know what you are looking at.

If you are concerned about your credit report, or even if you have never shown the slightest interest in your score, then consider the following information: Understanding your credit score is important, not only to know where you stand financially, but also to be aware of how credit works and what you can do to improve your score, not to mention maintain it.

“Your payment history accounts for 35 percent of your credit score.”

What Goes Into It?
Your credit report is essentially a summary of your financial history. This means it accounts for everything from past bill payments, the number of accounts you have had, how long your accounts have been open, recent credit activity and whether any of your debts have been referred for collection, bankruptcy or foreclosure.

According to the Consumer Financial Protection Bureau, your credit score is unique based on your individual information. There is no method of simply lumping people into categories when it comes to credit scores. Additionally, some people believe factors such as being employed matter to your credit, but this is not the case. Your credit score is only based on your credit history and your current debt.

Does Everything Count The Same?
Since your credit report is comprised of your credit history, you might be inclined to think that each piece of information is weighed the same, but, in fact, there are differences in how each part of your history is calculated. According to myFICO, the largest part of your credit report isweighed by your payment history. In fact, this number makes up 35 percent of your total score.

New credit accounts are 10 percent of your score and so does the type of credit you use. For example, some types of credit affect your score more than others, like credit card debt, which will have a stronger impact than a student loan. Some loans are designed to be long term, which means they won’t bring down your score as fast as outstanding credit card payments. Credit cards are easier to use, more readily available and because of that they come with higher risk.

However, everything you owe is also put into a category – amounts owed – which makes up 30 percent of your score. This is a significant number, which means staying on top of your monthly payments is hugely beneficial to your overall credit score. Additionally, the length of your credit history is taken into account as well, making up 15 percent of your score. It is for this reason you shouldn’t close out credit card accounts, even if you have cards you never use. If you close old accounts, it shortens the length of your report history, which can work against you. Having a long history helps your new debt have less of an impact, but it is still important to stay on top of it.

Does Applying For A Loan Hurt My Score?
Whenever you apply for a loan, regardless of the type, a lender is going to check your credit score to gauge how much of a risk you are. When your lender performs this action, it is called a hard inquiry, which will bring your score down slightly. This can also be the case when you apply for new credit cards, as the bank or provider will check your report for approval. For this reason, you should not apply for a large number of credit cards or loans in a short period of time.

“Check your report so you know where you stand.”

However, hard inquiries are common and the impact they have on your score is easily repairable. These inquiries are not made to prevent you from taking out loans, but to keep you from relying too heavily on loans and credit. Additionally, according to TwoCents, a financial and lifestyle blog, you can check your own credit report as well, and this is known as a soft inquiry. This will not affect your credit as much.

What Are The Actual Numbers?
Credit score range from 300 – 850, with 850 being considered excellent and 300 very poor. 720 is commonly accepted as a good score, and then from there it is referred to as fair, poor and ultimately, very poor.

Checking your score to see where you stand is a good idea. And you shouldn’t wait until a lender checks it. You should be proactive about your credit score. Know what you numbers are so you can improve or maintain whatever path you are on. Additionally, there might be mistakes you can have removed, but this is only the case if you take a look.

Don’t be afraid of your credit score, instead just take a look at it and respond accordingly.