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Your Credit Reports

A credit report includes information from a variety of financial sources, combined to make up your credit score (also called credit history). This report covers a variety of things, but most can be split into:

  • Who you owe money to: (banks, hospitals, landlords and others), and
  • If you’re late making payments: Overdrawn accounts, credit card, auto loan, or mortgage payments made late, etc. Your credit report may also contain information about delinquent child support payments.

A fair bit of personal information is also included in your report, such as your name, your address, previous addresses, telephone numbers (yes, even if they are unlisted), your social security number, place of birth, and even partial employment history. Your credit report also includes matters of public financial record; things like tax liens, bankruptcies and civil judgments against you.

Right now, there are three large national credit bureaus that basically dominate the credit reporting industry: TransUnion, Equifax and Experian.

Between the three, these credit bureaus run roughly 1.3 billion credit reports a year (that’s more than 4 per person each year on average!), and each of the three bureaus has approximately 225 million consumer credit files on record.

A credit score (your FICO score) ranges from a low of about 300 to a high of 850 with an US average at a respectable 725. Scores above 720 are considered a “good credit” rating, FICO scores under 600 are judged to be a “poor”, and most numbers in the middle will give lenders some concerns, but aren’t necessarily so bad the consumer can’t get credit.

Why Is Your Credit Report Important?

Your credit report is significant due to the fact that most financial decisions in your life will involve the data in your report. At the most basic level most lenders will use your report to determine if you will be permitted credit. To a lesser degree it is even used to determine the rate you pay for mortgages, car loans and even home, car and life insurance.

As a quick example of how your credit rating can impact things – consider a mortgage of $230,000 amortized over 30 years. Assuming that your minimum FICO score just barely qualifies, you might pay 8.1% interest, while with an above average score you’d pay just 6.5%. The lower interest rate represents a savings of almost $250 a month, nearly $100K over the entire the term of the mortgage!

Improving Your Credit Rating:

Although there are some small differences between the way you FICO score is calculated between different agencies, the basic formula is as follows:

  1. 35 percent of your total score reflects your payment history.
  2. 30 percent of your total score reflects the amount of debt you currently have.
  3. 15 percent is on the amount of time you have had a credit history.
  4. 10 percent on the number of new kinds of credit you have recently requested. (are you acquiring mass credit because your financial situation is bad?)
  5. 10 percent on the types of credit used.

Understanding how your score is calculated should give you some insight on how to improve your FICO score:

  1. Pay your bills on time
  2. Lessen the amount of debt you owe, especially if you might appear ‘over-extended’
  3. Limit your requests for new credit
  4. Stay away from higher risk credit

If you’d like to learn more about your own reports, it’s probably easiest to use the credit bureau-operated to obtain a free copy of yours from each credit reporting agency. In the U.S.A. a federal law the FACT Act (Fair and Accurate Credit Transactions Act), entitles every legal U.S. resident to one free copy of their credit report from each credit reporting agency once every twelve months. This report shows marks on your credit and other information, it simply does not contain credit ‘scores’.

Periodically inspect your reports for errors on your personal information such as a wrong name (e.g. maiden name listed but not married name), wrong addresses (both present and past), correct social security numbers and so on. You should also review your actual financial information and notes for things like loans incorrect loan balances or incorrect or outdated data on credit cards or other accounts you previously cancelled. The more accurate your reports are, the fewer questions a lender will ask, so report all errors and have any found mistakes fixed as soon as possible.

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