Trying to understand a credit report can be a monumental task, if you’re not familiar with the terms and numbers used to rate your credit-worthiness. Fortunately, you don’t need to have an MBA to do it. However; it is important to understand the information on a credit report. This information directly affects your ability to acquire credit cards, buy a car or a house, rent an apartment, and even getting a job. It’s also important to note that understanding your credit report can prevent inaccurate information from staying on your credit history as well as protecting you from identity theft.
The key to understanding a credit report is to understand your credit score. Also known as a FICO score. Created in 1989 by the Fair Isaac Corporation. It’s the scoring system used to measure the likelihood of people repaying a loan on time by using a mathematical formula. Creditors use this formula to keep lending practices fair.
Here’s how it works:
1. 35% of your score is based on your payment history. Are paying your bills on time. Your most recent payment history is more significant than your old payment history.
2. 30% is based on the amount of debt you owe and how much credit you already have. Is your credit maxed out? How low is your ratio? The credit used to the credit you have available makes up your ratio.
3. 10% is the type of debt(s) you have. Creditors are mostly interested in seeing how you manage paying your mortgage, car payment, student loans, and credit cards.
4. 10% -credit shopping. How much are you looking to borrow? If you’re seeking a mortgage for the first time; this is okay. If you’re maxed out and looking for more credit, this could pose a problem. Maxing out and looking for more credit can hurt your score.
So what does this look like on paper? Your credit score is typically a three-digit number ranging from 350 to 850. This is the number creditors want to know, when qualifying you for a new car and/or the purchase of a house. It will also determine the interest rate you will get. Your cost for borrowing the money. For example; suppose you want to borrow money to buy a house. According to the Brookings Institute; if you have a credit score of 700 or higher, you can get a $150,000, 30-year mortgage. The cost of interest you will pay is about $10,000. If your score is 600, the same mortgage will cost you an additional $2,000 or $12,000 per year over the life of the mortgage. This can add up to a significant amount of money.
A good credit score is between 600 and 700. Anything above 700 is considered excellent. If your score is below 600, you might need some work. Check your credit report at least twice a year. This will help prevent against inaccuracies and fraud. Make an effort to clear-up any credit blemishes on your record. A good credit score increases your buying-power and will save you thousands of dollars in interest payments. You’re entitled to one free annual credit report from each of the three credit bureaus: Experian, Equifax, and Transunion. To request your free report, go to annualcreditreport.com.
Wong, U. (2006). Boost Your Credit Score. Essence Magazine, Vol.37 (5), p123-126, 3p, 2c.
Spruell, S. (2007). Your 30-Day Credit Checkup. Essence Magazine, Vol.37 (12), p103-104, 2p, 2c.