Whether applying for a home mortgage, buying or leasing a car, or even getting a new cell phone plan, odds are good that a credit check is going to be run. The basic idea is to see how likely it would be for the borrower or customer to not pay their bills. Easy enough, right? Getting to that determination is rather extensive, and it all starts with a credit report.
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Some Basic Information
Don’t worry if you have no idea what’s actually on a credit report. Apparently, not many people do. It’s important to note that there are multiple credit reports gathered by different organizations. The three most well known ones are Equifax, Experian, and TransUnion. They each produce their own credit reports independent of one another. However, each of these reports are fairly similar, as they all will present similar information. All reports have:
- Personal Information: Your name, date of birth, social security number, and other information to help identify you.
- Credit History & Accounts: All of the credit accounts you have, including credit cards, mortgages and loans. Information on this includes your credit limits, payment history, when you opened the accounts, etc.
- Inquiries: A list of those that have checked on your credit history. This includes hard inquiries, where you’ve given permission to companies or individuals to look at your credit history and soft inquiries, where you or your current creditors request information on your credit history.
- Collection Items: Any public information from the state or county courts or credit agencies about issues with collecting debt payments that you owe. This includes any information about bankruptcies or liens against your paycheck or house.
All of this information helps to shape your FICO score, which is a huge factor that determines whether lenders will lend to you.
Related Article: The Average Credit Score: It’s on the Rise
The FICO Score
The FICO score was created by Fair Isaac & Co. in 1956 to figure out how likely people are to pay back their bills and debts. The FICO score range is 300 to 850 points. The 300 score indicates that a person is not likely to pay back their debts, while an 850 score shows that a person is very likely to pay their debts back. The score is determined using the following breakdown:
- 35% comes from Payment history
- 30% comes from the Amounts you still owe
- 15% is based on your credit history
- 10% is based on the type of credit you’ve used
- 10% looks at any new credit you’ve taken on
These factors will help to give you an idea of how to work towards building that FICO score. Pay your bills on time, work on lowering the amount of money that you, have an extensive credit history, keep a good mix of different debts, and try not to open a lot of credit accounts at once. Working on these things will help to raise your FICO score.
Be wary though – not all scores that a creditor or lender provide are FICO scores. There are a few different scoring systems. When looking at the score that you’ve been provided, it’s best to check it against this measurement scale, as well as the criteria used to determine that score.
Related Article: What credit score is needed to buy a house?
Getting a Report
Keeping an eye on your credit reports and your credit history will help you keep track of your credit score and help you catch potential discrepancies.
Getting a hold of credit reports is easy. The three credit bureaus will provide their reports for free once a year. Otherwise, the reports cost $20 or less.
And don’t worry, if you ever need a crash refresher course on credit reports, Vantage and the CFA have a credit report quiz.