Credit reports can make or break our financial future. More than any other facet of personal finance, a credit report is more than just a compilation of past transactions: It’s a complete reflection of how responsible we’ve been with managing our money. The information contained in a person’s credit report determines the likelihood of being approved for lines of credit, auto and mortgage loans, and other important banking services we can’t do without.
Getting acquainted with some of the fundamentals behind credit reporting can help us understand better just how our borrowing and spending habits impact our credit scores — and, if you have bad credit, how you can take charge of better money habits and improve your financial standing.
A credit report comprises a person’s credit history, which contains information on their financial behavior — your overall “credit health.” Everything from your bill payment history (including timely and missed payments), to credit card debt, bankruptcies, foreclosures and, of course, successful completion of auto and home loans, are all a part of your credit report. These reports are useful for lenders and financial service providers to gauge a person’s creditworthiness, and how high or low of a risk they may be in borrowing and paying back money.
Each time you pay a bill, miss a payment or pay for goods on a credit card, your credit provider (for example, American Express) reports this data to one of three credit reporting agencies or CRAs. Each of the three bureaus — Equifax, Experian and TransUnion — assigns a 3-digit credit score, using a separate, though not dissimilar, grading criteria.
“FICO” is the most common credit model and ranges its scoring between a scale of 300 and 850 — 300 a low score, 850 the highest. When applying for a credit card or a loan, lenders refer to both your credit report and credit score to see if you qualify. The higher your score, the better your credit is. CRAs take into account your credit behavior, and using a statistical formula, calculate your individualized score.
All consumers are entitled to a copy of their annual credit report. There are several credit report companies, but consumers should do their research and find a reputable service. Inaccurate “FAKO” scores are common. Avoid companies who charge fees for credit reports — you’re entitled to a copy of yours each year, free of charge. The only place you can access your annual free credit reports is at annualcreditreport.com.
One way to keep your credit report up-to-date is to keep a generous amount of revolving credit. Using your credit card just a few times a month keeps your credit utilization ratio low, but also shows CRAs that your credit usage is regular and revolving. Don’t rely solely on your checking account for your weekly and monthly expenses — while accessible, a checking account has no bearing on your credit report, and can result in a “zero” FICO score.
Financial experts suggest taking advantage of a credit report monitoring service to ensure that your own report is current and free of errors. Rebuilding poor credit is easy with time, patience and financial vigilance. By staying on top of your credit activity, you’ll not only raise your credit score in time, but possess a credit report that’s worthy of an A+.