Credit 101
What Information Does a Credit Report Include?
Your credit report begins with your basic details – your full name, birth date, address, past addresses and so forth. Credit reports should no longer include details about liens and judgements, but bankruptcies do still appear.
Next, you’ll see an informational breakdown for each line of credit you have. Account time, account age, number of payments made, missed payments, late payments and other facts are all included. Payment history, credit utilization, credit type, account age and credit inquiries all factor into your credit score.
After a set period of time – seven years of 10 for a chapter 7 bankruptcy – accounts “fall off” your credit report. That means they don’t appear anymore and no longer impact your credit score.
What is a Credit Score?
A credit score is a number that third parties, especially lenders, use to assess the risk of lending you money. The score is one way banks, credit card companies and other institutions assess the likelihood that you can or will be able to pay off any debts you accumulate. A higher credit score indicates that your current financial circumstances and your historical behavior demonstrate a willingness and ability to pay off any loans you may be approved for.
In the United States the credit scoring system you will hear about most is the FICO score, a score used by the major credit agencies to rate your creditworthiness. Your FICO score will be between 300 and 850 with a higher score being better. When it comes to your credit, lenders may sometimes refer to it in terms of Credit Level or Credit Quality such as Poor, Fair/Average, Good or Excellent with each category referring to a range of FICO scores.
Poor credit is considered anyone with a FICO score under 580
Fair or Fair credit rating will be between 580 and 669
Good credit is between 670 and 739
Very Good credit is between 740 and 799
Excellent credit is anything above 800
The Components of Your Credit Score
The makeup of your FICO score is broken up into a bunch of major factors:
Payment History (35%)
Debt Burden (30%)
Length of History (15%)
Types of Credit (10%)
Recent Credit Searches(10%)
Payment History
Your payment history is by and large the largest single component of your FICO score. The best way to think of your payment history is to consider it a track record of all the things you've done wrong when it comes to credit and a measure of how you behave when it comes to your debts. You don't get a boost for paying things on time as much as you get penalized for not doing so. A history marked with negative information would indicate that the person often faces difficulty meeting their debt obligations, or rather someone that has a risky attitude when it comes to their credit. Both are signals to the lender that they may want to be more cautious when it comes to making additional credit available.
Late Payments
The most common problem consumers face in the payment history component is late payments. Whether it was because you simply forgot or were struggling to make ends meet, being late on a monthly payment for your credit card or a loan will usually cause a negative adjustment on your credit score. How much of an impact can also depend on how late you were with the FICO score making larger downward adjustments the later it is. You will see this reflected on your credit report with late payments marked under categories like 30-days or 60-days etc. One thing to be aware of is missed or late payments on what may seem like trivial amounts can be just as damaging.
One major reason for keeping the number of credit cards and accounts you have at a manageable level is to avoid these issues. It's way too easy to open up a store credit card, make a charge on it and simply forget about the account. Even if you're making thousands of responsible payments on all your other accounts, forgetting to pay off the $50 you spent on that one off charge can dramatically hurt your credit score.
Credit Utilization
Credit Utilization or Debt to Limit ratio is often brought up when discussing the Debt Burden component. It is one of the pieces that make up this piece of your FICO score and is a measure of the total amount of debt on your credit card accounts against the total limit allowed on those accounts. A lower credit utilization, meaning your average balance is lower relative to the total amount you could have on your cards is better for your score.
This ratio can come into play when you might otherwise consider canceling an existing credit card. Even if you don't use that card, as long as it doesn't have any fees associated with having it around, your credit utilization figures look better because of the larger total credit limit overall. This also means that requesting a higher credit limit on existing credit cards can help your credit score since it will help lower the overall ratio.
Length of Credit History
Your score accounts for the length of time the various accounts under your name have been around, including the average amount across all the accounts as well as the length of your oldest open account. The length of your history helps to indicate how representative the other factors of score are about your creditworthiness. The older your accounts and your overall credit history, the larger time frame from which a company can accurately judge both your finances and behavior towards credit. A few years of data about a consumer is a better indicator for how they may act in the future than having only a few months of information.
Types of Credit
The smallest component of your credit score, your FICO score takes into account is the different types of debt or credit used. Your accounts are classified into things like revolving credit (credit cards), mortgages, consumer finances or installment loans and a history of having a broader exposure may be a positive signal. Why should having a history with more credit types matter? Having an existing history of exposure to different types of credit is a helpful indicator that a consumer is familiar with the different financial products and can manage them appropriately. Consumers also may not have the same attitude towards paying off a credit card vs. their mortgage so a lender might want to be more cautious with someone with a narrower exposure history.
Recent Credit Searches
The last component of the FICO score is an adjustment based on any recent searches or hard inquiries made into your credit profile. This tracks the number of times lenders have requested your data, with the potential for a consistent high number of requests to drag your score down.
The FICO score calculation does make a number of adjustments in how it evaluates the number of inquiries, however. When it comes to mortgages, auto loans, and student loans it's expected that most consumers will shop for rates at a large number of lenders so all searches of these types that occur within 14 to 45 days of one another are considered a single request. These inquiries also take 30 days before they affect your score so that you will be evaluated fairly while rate shopping. These adjustments mean that consumers seeking a loan are best served it they compress the time in which they rate shop, such that they have the least amount of impact on their score overall.
Lastly, consumers often undergo credit score queries for reasons other than getting a loan. This may include checking your own credit score, or a requirement as part of employment. In these cases, the queries are not considered a hard pull/inquiry and will not appear on the reports used by the lenders for evaluation.
Why You Have Three Different Credit Scores
Given the above components for your credit score, why do consumers have three different scores? This is because there are three different credit bureaus that independently calculate your score: Experian, Equifax and Transunion. While the three companies use very similar processes for determining your credit score, they there are small differences in how they're done. Another complication is that the three bureaus may not all have the same information on you in their systems when making these determinations. This often occurs when an account in your credit history has been reported to one bureau but not another.