Understanding Your Credit Report

Large purchases, like buying a car or home and even applying for student loans, all have something in common, they all access your credit report. Accessing your credit score through your credit report helps to determine your “creditworthiness.” It’s more important now than ever to monitor and maintain your credit regularly. By knowing the ins and outs, you can be in a better position to reach your financial goals. What’s more, checking your credit report may help you identify errors and help detect fraud and identity theft.

While seemingly complex, the process of collecting information for your report and creating a score is something that is necessary for consumers to comprehend. Credit reports contain your personal data and critical information collected by credit bureaus from lenders. This includes everything ranging from dates of loans to balance amounts. The three leading bureaus of credit  reports are Equifax, Experian and TransUnion.

The data in their reports is then used by scoring agencies, such as the Fair Isaac Corporation (FICO). The agency then uses its special algorithm or scoring methodologies to generate a number. These scores typically range between 300 to 850. The higher the number, the better the interest rates will be as well as an increased chance of extending credit. To put it simply, credit scores are utilized by lenders to determine how likely you are to make your payments on time; it’s best to have a high score.

There are a variety methods to improve your score and, in turn, secure better interest rates, insurance premiums and possibly a job that you’ve applied. The first way is to always pay your bills on time. Your payment history makes up one third of your FICO score. Another 30% takes into consideration how much you owe, known as credit utilization, so it’s advised to keep any card balances low. The third criteria that FICO examines is the length of your credit history.

Other ways to improve your score are to have a long-established account, such as a credit card, and not to close accounts that are doing well. The fourth and fifth portions deal with newness and types. It’s advised not to open many lines of credit over a short duration because this negatively affects the FICO score. It is also recommended to have a variety of accounts, which can include credit cards, store accounts and mortgage loans.

Overall, having strong credit health is empowering and one of the best things you can do to help achieve your financial goals. Knowing and understanding your credit score is imperative for financial wellness. Make sure to check your score frequently and take advantage of free annual reviews of your reports to help you reaching your full credit potential. For more information and eye-opening statistics, please see the accompanying infographic by Stein Saks.