How to Understand Your Credit Report and Credit Score

By: Teri Treadway
Submitted: 2008-05-14 16:37:57
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Seventy-five years ago, obtaining credit could be as simple as giving your word and a handshake across the desk Today’s roller-coaster real estate prices and flagging financial markets dramatically changed any “handshake” policy; and obtaining financing now, especially for a home, means an examination of your credit history, documentation of records, and a carefully scrutinized credit score.

Understanding how your credit score is determined and how to protect it will allow you to obtain a better interest rate on a loan, which ultimately makes a difference in the overall price you pay.

Your credit score - It is a simple three-digit number, but that little trio of digits packs a powerful punch when it comes to your ability to obtain financing for large purchases - a home, a car, a vacation home or investment property. That score can help open the door to a new home or slam shut your ability to purchase any large item that requires financing. In 1980, the three main credit bureaus - Experian, TransUnion and Equifax - began using a scoring method to rate the risk of lending to an individual. The most commonly used scoring method is the Fair Isaac and Company, generally referred to as your FICO™ score, which ranges from 300 - 900 - and it can heavily impact a lender’s perception of your ability to repay a loan.

You can obtain a free credit report every 12 months from each of the three main credit bureaus. Once you receive your credit report and can reference your payment history and credit accounts that are currently open, you can determine the steps needed to maintain or improve your credit.

There are factors that actually may seem contradictory when reviewing issues that impact your credit score.

• Having a large number of credit cards does not mean that you have more or better credit. It only signifies your potential capacity to obtain debt.

• Opening new credit card accounts is not beneficial to your financial credit structure. It connotes a capacity to obtain more debt—or worse, that you have financial difficulty and need credit cards to continue to function at your current level.

• From a lender’s perspective, the more credit that is available to you, the greater your potential for financial difficulty.

• You should not use credit cards to make large purchases before you plan to make another large purchase. For example, you should not add debt to your record by making a large furniture purchase with credit cards before applying for a home loan. Your credit score is impacted by the amount of debt you have.

When examining your credit history, there are other important elements you should know:

1. A credit report is not a credit score. You can obtain a free credit report via www.AnnualCreditReport.com. This report will provide your history of credit card, mortgage and other loan payments. Your credit report does not include your credit score. At the same website and for a minimal fee, you can also purchase your credit score from each of the three main bureaus.

2. Factors that contribute to your credit score:
Payment History (on-time vs. late payments): 35%
Credit balance: 30%
Credit history: 15%
How often you have applied for new credit: 10%
Types of credit you use: 10%

3. Credit providers are not the only entities who access your credit score: Service providers such as insurance and phone companies can utilize your credit score to set your premiums and decide if they will provide services to you.

4. Your credit report can contain errors. It is important to carefully review your credit report to ensure all the debt applied to your report is actually your debt and current. If you find an error, it is necessary to report it to all three credit reporting agencies and carefully monitor your record to make sure it is corrected.

Once you have carefully examined your credit history, if you see room for improvement there are three steps to take.

• The most important step in managing your bills and paying off debt is creating a workable budget and, more importantly, making a commitment to follow it.
• Focus on late payments. If you have current overdue payments, call the service provider and ask to re-set a schedule that will help you make up those payments.
• Make the first repayments to the companies with whom you have the longest credit history. The longer your credit history with a company, the more beneficial it is to the record, as that connotes your commitment to repay debt.

Article source: Expert Articles