Understanding Your Credit Report

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Your credit report is essentially your entire financial history all tied up neatly (ideally) into one document. The general purpose of a credit report is so that potential lenders and other institutions whom you may enter into a financial contract with, can have a relatively simple way to assess your ability to remain financially solvent and responsible. This helps lenders decide whether you are someone they’d trust to pay them back.

Due to The Fair Credit Reporting Act, you have the right to receive a free yearly copy of your credit report from all three of the major credit reporting bureaus: Equifax, Trans Union, and Experian. Getting a hold of your credit report is actually the easy part. Reading them with a decent level of comprehension may be a different story, especially if your credit information is lengthy or contains multiple adverse or potentially negative items. Regardless, it is important that you understand what you’ll be presented with when your credit report arrives in the mail. Taking a moment to learn about the parts of your credit report means that you’ll be better able to make improvements where possible and pick up on any reporting errors.

The information used to create your credit report and your overall credit score (different from your report, but very closely related), comes from any companies with whom you have done or are currently doing business, and from information in public records. The general information gathered includes your given name, any aliases, your current place of residence (plus all past addresses), birth date, and your Social Security number. Once your identity has been authenticated, the following information will be gathered: your bank/credit accounts, loans, mortgages, payments, delinquencies, bankruptcies, short sales, foreclosures, court cases, and any wage garnishments.

All of this information will be listed on your report, and each item’s importance differs. Your financial details are divided into the following five variably weighted categories to calculate your overall credit score:

  1. All accounts in use (10%): Included in this category are all of your credit cards, loans, mortgages, garnishments, etc.
  2. Recently acquired accounts and inquiries from creditors (10%): Accounts and loans that you have very recently opened or applied for fall into their own section because it tells creditors that you may be taking on debt that they don’t know about. When you apply for a credit card or another type of loan/financing, each potential lender will want to know your credit history, and their inquiries into your credit history will be noted on your report. For these reasons, applying for too many loans or credit cards sends up a red flag on your credit report.
  3. Your credit history length: (15%): How long have you been using credit cards and/or loans?
  4. Debt to credit ratio: (30%): This is the amount of money you owe as compared to your overall credit limit. High credit card balances on which you make minimum payments will lower your credit score. On the flip side, a high credit limit while maintaining relatively low balances means your debt to credit ratio will raise your credit score number.
  5. Your ability to make payments! (35%): Your success or failure at keeping all of your accounts current and making timely payments is obviously a crucial component when it comes to having a good credit report and; therefore, a high credit score number.

If you need further assistance interpreting all of parts of your credit report, or are interested in taking steps to improve your credit rating, drop us a line in the comment box. Visit our Facebook page and get a free consultation just for “liking” our firm!

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