A good credit score means everything to both the consumer and to the financial institution or lender. To the consumer, a good credit score means lower interest rates and better payment terms. To the lender, it means that consumers will continue to receive better products and better service.
However, there is more to a credit score than just numbers. Whenever an application for a credit card or loan is received, a lender pulls a credit report to decide on the following:
- Approval
- Terms of Payment
- Interest Rate (if you qualify)
Types of Credit Scores
FICO scores are most popular among lenders. Depending on the type of credit you're seeking, your lender may evaluate your credit risk using different FICO Score versions.
Each major credit bureau (Experian, TransUnion, and Equifax) also has its own credit score based on your credit report.
Factors that Affect Your Score
Lending specialists are trained to objectively evaluate a credit report based on the following:
Payment History: Are bills paid on time? Are there any missed payments?
Amount of Debt: How much credit is available and how much is being used?
Length of Credit History: What is the average age of an account? Is credit established?
New Accounts: When was the last credit application? Are you regularly applying for new credit?
Credit Mix: What type of credit accounts are in the report, e.g., mortgage, credit card, vehicle loans, etc.?
Understanding the Credit Report
Although each credit reporting agency formats and reports this information differently, all credit reports contain the same categories of information. Think of your credit report as your “financial resume”.
Personal Information
- Name
- Social Security Number
- Date of Birth
- Last Known Addresses
- Employment Information
Account Information
- Type
- Date Opened
- Credit Limit or Amount
- Balance
- Payment History
Credit Inquiries
Soft inquiries occur when a report is pulled without an accompanying credit application. Inquiries like this usually happen as part of an employment application. This type of inquiry does not usually affect your credit score.
Hard inquiries occur when a lender pulls a report as part of a credit application. These types of inquiries usually have a relatively small impact on the credit score.
Potential Red Flags
There are certain items on your credit report that might make a lender uneasy.
- Delinquent or missed payments
- Overdue debts from collection agencies
- Bankruptcies
- Foreclosures
- Tax Liens
Free Credit Report
Consumers are entitled to receive a FREE copy of their credit reports from the three credit reporting companies every year. To learn how you can get a copy, please click here.
Because credit reports contain personal information consumers are advised to monitor their credit regularly.
Developing Smarter Habits to Help Improve Credit Scores
Good credit scores result from fiscal responsibility and habits developed over time. To help improve credit scores, here are examples of #SmarterHabits to develop:
- Make sure all information on your credit report is accurate and updated
- Monitor your credit card balance
- Maintain a low credit card balance, use credit responsibly
- Pay bills on time
- Do not borrow more than you can afford to pay
- Maintain a credit card or two but do not apply for a credit card every chance you get
- Strive to pay off debt instead of transferring it from one credit card to another
- Open a secured credit card to build credit
- Speak with your creditor to find alternative payment solutions
