Tips for understanding your financial "report cards"
The way you’ve handled your finances in the past can predict how you may behave in the future. That’s why so many people and businesses are interested in your credit report. You’ll probably need to allow access to your report whenever you want to:
- Take out a loan or apply for a credit card
- Rent or buy a home
- Apply for a job
- Get insurance
- Purchase cars, large appliances, or even cell phones
Get to know your credit report.
Your credit report or credit history is a report on your life—the financial part, anyway. The three major credit bureaus (also called credit reporting agencies) collect information from public records and from companies that you do business with.
They use that information to create a record that includes:
- Personal information to identify you, including name, current and previous addresses, and Social Security number.
- A list of your credit accounts, including reports from lenders on their history with you.
- Public record information and information from collection agencies, including delinquent accounts, bankruptcies, foreclosures, lawsuits, wage attachments, liens and judgments.
- Credit inquiries—a list of everyone who has asked to see your report in past two years.
Make the grade with your credit score.
When you apply for any form of credit, lenders want to know: will this loan be repaid? Your credit score assigns a grade to your credit history and expresses your creditworthiness as a single number. Higher credit scores mean you’re less of a risk to a lender, which means you are more likely to be able to borrow larger amounts, at better interest rates.
The most commonly used credit scores are provided by Fair Isaac Corporation and are known as FICO® scores. They can range from 300 (the worst) to 850 (the best). Lenders differ, but a good score is usually considered to be 700 or above.
Different factors from your credit report have more effect on your score. The key factors include*:
- Payment history (35%). On-time payments on all your accounts help you get a higher score. The score is lowered for late payments, delinquent or overlimit accounts, bankruptcies, and liens.
- Total amount you owe (30%). This includes the ratio of what you owe to the amount of your available credit. Maxing out your credit lines can lower your score, but so can having too much available credit. Try to avoid using more than 50% of your available credit, and ask your credit issuer to reduce credit lines that you’re not using.
- Length of credit history (15%). This shows how long you have been using credit and how you have managed your finances in the past.
- New credit accounts and inquiries (10%). This includes accounts you’ve opened recently, and recent inquiries from companies you have applied to for credit. Applying for a lot of credit can lower your score.
- Types of credit in use (10%). Your credit accounts, including credit cards, installment loans, mortgages, and other credit.
Because each credit bureau may have slightly different information about you, you actually have three different scores, but they usually are fairly close.
Test for accuracy.
A good credit report can be incredibly helpful as you work to achieve your financial goals so be sure yours is correct. Experts recommend that you review your credit report once a year to be sure there are no mistakes. You can get one free report a year from each of the three major credit bureaus by visiting www.annualcreditreport.com or by calling 1.877.322.8228.
If you find any errors, report them to the credit bureaus—and to the originating company—to have them corrected. And if you think fraud or identity theft has occurred, contact the credit bureaus immediately.
Boosting your score.
The best thing you can do to keep your credit score up is to pay your bills on time, and limit your debt payments to less than 20% of your income. See Tips on maintaining a good credit history and How to repair your credit history for more information.
The important thing to remember is that both your credit report and your credit score are all about how you manage money. Good financial management can help guarantee you make the grade.
* Source: Fair Isaac Corporation, http://www.myfico.com.
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