Your Credit Report
Your credit report contains information about your background and credit history, and is used to determine if you are credit worthy. So if you are denied a credit card, pay your mortgage late or file for a bankruptcy, these items will be recorded in your credit report. The three major companies that compile credit information are: Equifax, Experian and Trans Union.
Your credit report keeps track of a number of details including:
- your addresses
- mortgage balance
- mortgage payment history
- checking accounts
- credit card balance
- credit card payment history
This means that if you pay your bills promptly, this will be reflected in the credit reports. However, if you are routinely late with your monthly mortgage payment, credit card payments, and have a judgment against you from a lawsuit, this will also show.
Credit Score
Based on your credit history, you are given a score, which tells a lender what the risks are if they offer credit to you and consequently determines the degree of your credit worthiness. Your credit score is extremely important, as it determines your eligibility for all kinds of financial activities, such as home loans and credit cards. Your rating is affected by a number of factors, some of which are controllable, others of which are not.
The formula used by all three agencies is known as FICO, after the Fair Isaac Credit Organization, one of the first companies to begin using credit ratings in the 1950s. A FICO score is a number ranging from 300 to 850, with 300 being the most risky and 850 the most secure in the eyes of lenders. Anyone with a credit score under 500 is unlikely to be able to secure any type of loan. A credit rating of over 650 is normally high enough to get favorable terms and will almost always be accepted for new lines of credit.
The FICO score is calculated based on:
- 35%: the number of delinquent payments
- 30%: the difference between your total credit limit and the total amount owed - the less credit you use out of the amount you have available, the better you will look
- 15%: how long you have had lines of open credit (therefore cancelling credit cards can hurt your credit score)
- 10%: the diversity of credit lines you have (a greater diversity of credit types makes for a better credit score)
- 10%: new accounts and applications for credit (too many new accounts and applications at one time result in a lower credit score)
In order for a lender to obtain a credit report, they must first have authorization from you.
Checking your Score
If you have been denied a loan or credit card, then the lender must give you details of the credit agency they have used. While Equifax, Experian and Trans Union have been in the credit reporting business for many years, they are by no means infallible. You many find inaccuracies and mistakes on your report that may weaken your credit score.
Since 2005, everyone is entitled to receive one free copy of their credit report from each of the three major agencies each and every year. You may also request a free credit report each time you are denied credit because of your credit history. If you discover any inaccuracies in your credit report, you should notify all three major companies and supply them with the correct information.