What Affects Your Credit Report?

What are credit reports?

Credit reports contain personal information. Information like one’s address, payment history, where one borrowed money from, and what one borrowed money for are a few examples. This information is collected over time by credit reporting agencies or also called credit bureaus. Like in school, depending on how well one performs in different classes, one’s grade is either good, bad, or in the middle. This is almost like credit reports because depending on how well one can manage one’s accounts, payments, and loans one receives a good or bad credit score.

The highest credit score one can have is 850 while the lowest is near 300. Any score above 670 is considered good. One’s credit score is important because commercial lenders decide whether or not they should loan money to someone based on one’s credit score.

Payment history 

Having a good payment history is an extremely important part of one’s credit score. Payment history is basically one’s total history of payment to lenders. It shows lenders if one has missed any payments and if so how many. Lenders check payment history because they use it to predict if one will pay them back on time. Missed payments are a huge factor in one’s credit score and missing just a few can bring one’s score down drastically.

Credit usage 

Credit usage is the second most important part of one’s credit score. To calculate one’s credit usage one needs a credit utilization ratio. To find this ratio, one must divide the total revolving credit one is using by the total of one’s revolving credit limits. This ratio tells lenders how much credit one is using vs. how much one can use. Usage above 30% is seen as negative to creditors. 

Credit Utilization Rate = Total Debt / Total Available Credit

Credit history length

Credit history accounts for how long one has held credit. Typically the longer one’s credit history is, the higher one’s credit score is. One’s credit history starts when one takes out one’s first loan or when one opens your first credit card. It takes around 7 years on average to posses a good credit history. Credit history includes the age of one’s newest credit account, the age of one’s oldest credit account, and the average age of all of one’s accounts. Additionally how long it’s been since one last used a type of account matters too. So in most situations when it comes to credit history length, the older the better. 

New credit 

Two things can affect new credit. Hard inquiries and how many credit accounts one has recently opened. What are hard inquires? A hard inquiry takes places when one applies for a new line of credit. Examples would be a loan or a credit card. This means that a creditor has asked to view one’s credit file and determine if it is risky or not for a lender to lend to you.

Credit mix

Another important piece of one’s credit report is credit mix. Credit mix makes reference to the different types of accounts one owns. A good credit mix generally has both revolving credit and installment loans. The phrase “don’t put all your eggs in one basket” is helpful when trying to understand credit mix. It’s essentially like saying, invest your money in different things and not just one thing. An example of a healthy credit mix could be having a few credit cards, one’s mortgages, and an auto loans.