Understanding Your Credit Report

October 25, 2017


Disclaimer: This topic is my baby. I have a passion to make sure every one gets the information they need about financing. 


This may be a boring topic for a few of you, but I am hoping this will help some understand what can impact their credit report. Now I am sure you're asking yourself, "Why should I listen to this chick? What does she know?". I have been in the banking industry for quite some time, and I have specifically been in the loan department. I have touched all types of loans from personal loans to home refinances and HELOC's (Home Equity Lines of Credit). Majority of the information I am about to provide to you I have learned about Credit Reports is either from first hand experience or from myFICO.com.


We will start with myFICO, this is not a sponsored post, I am just providing you a resource of where you can go to further educate yourself on the subject matter. The site provides a booklet that breaks everything down to laymen's terms for better understanding. I mean how often have you talked to a loan officer and everything they told you sounded like another language? It's like Charlie Brown's teacher all of a sudden showed up, and if you don't understand it how will you accomplish any financial goals?


The first part to know the difference between a VantageScore and a FICO score. I have seen that the difference between the two is quite significant. The VantageScore can have an individual in the Excellent Range, and the FICO score can leave an individual in the Good Range. The VantageScore was created to show a consistency across all bureau., however banks use FICO scores. The VantageScore was created to have more consistent and predictable model. VantageScore was created by all three credit bureaus and the FICO was created by Fair Isaac Corporation. FICO as stated previously, is primarily used by lenders and other businesses. The VantageScore is still new and is why lenders still prefer using the FICO score.


Your credit is like trust, it's hard to build but can break very easily if you don't take care of it. To dive right into it, your FICO score is made up of 5 main categories; payment history, new credit, amount of debt, credit mix, and length of credit history. To keep that trust in tact it is important to understand each factor or category. Now keep in mind various accounts report on your credit bureau for about 7 years, sometimes longer, so payment history is critical. It is important to pay all debts on time as a bank will report to the credit bureau an account in past due status as soon as it hits the 30 day mark. If you do that just once, all debtors will see that you have made a payment late. If this happens multiple times, your score drops, the trust is gone, and you will end up with a higher interest rate.


New credit simply breaks down to, how often are you shopping for credit? Each inquiry can stay on your credit report for 2 years, and the FICO score is affected by the inquiries from the previous 12 months. In addition to the inquiries and shopping, the new credit looks at the type of accounts that were opened as well, and how recently, whether loans or revolving accounts. Amount of debt is easiest to explain as credit utilization. How much credit are using when it comes to revolving accounts and loans compared to their limit or original balance? I looked at the factors affecting my score recently, one was my auto loan, it was a negative factor because I haven't paid down on the balance as fast as the credit bureau would like. Credit utilization also looks at the accounts with balances and how close the individual is to over extending themselves. Think of your debt-to-income ratio as well when it comes to credit utilization. Now then there is the credit mix. Credit mix, is simply a look at the type of credit that has been extended to you. Lenders will look at payment history of past loans when the individual is applying for a loan, so it is important to have a mix. I have had countless conversations with those that are close with me get mad they didn't get the best rate with such an awesome score, then I have to explain to them that their awesome score is made up of credit cards with very little to no usage, how are they going to get the best loan rate if they never had a loan?


The last one, length of credit history, is in my opinion one of the more important categories. Lenders look at how long an individual has been using credit, how long it has been established, which all improve the overall credit history. Those who are just kicking off their credit can be denied due to insufficient credit history because the bank doesn't know the risk involved. It's easiest to create credit history by credit cards. I have one credit card that has been open since I turned 18, I use it a few times a year, and make sure to pay it off during the billing cycle as the rate is astronomically high. I keep it because of how long it has been open. I can't tell you how much it hurts my soul when people close all their lines of credit because they want to be debt free. There is a difference between being debt free and having no credit history.

Why is it important to understand your credit bureau? Well as a little girl I was taught that without credit you're SOL. I am sure that is an exaggeration but think about wanting that home, or new car, or that 0% financing on your home improvement project. Credit plays a large role, and understanding the logistics will help you build the credit you want. So with that being said if you have a lower score than you hope for, you can definitely build it up, as the current score is only showing your current situation. 


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