Editor’s Note: FairShake is not an attorney, law firm, or financial advisor. Our content team conducts research to the best of our ability to ensure this content is accurate, but it does not replace professional financial or legal advice.
Every time you take out a new credit card or get a personal loan or car loan, that information including the amount of money you were loaned on your credit card or from your loan, and your payment history is maintained on a record. This record is referred to as your credit report, which reveals your credit score.
Your credit report is maintained by the three major bureaus: TransUnion, Equifax and Experian. Each of these bureaus receive every inkling of information related to your credit. They collect that information and they give you a score to tell other lenders how financially responsible you are. That score is known as the FICO score or your credit score. Similar to the way your school GPA is calculated, your credit score is a cumulative figure that combines all credit activity of an individual and compares its value against others in the overall pool.
Credit scores are important because:
A credit report is good for many things, particularly getting good loan rates, and good interest rates. There are many things that your credit score or credit report will reveal about you.
Credit scores are calculated using all the credit data available in your credit report. The data is grouped into five categories:
The amount owed category refers to how much of the available credit you have has been used and how much you still owe. Sometimes this is called the credit utilization or the debt utilization category. In any case, the amount of credit you have compared to how much of it you have used can heavily influence your credit score.
For example: Margaret has a credit card with $2,000 on it. That means she has $2,000 worth of credit. After making a few grocery runs, she used $300 of that credit. This will give her a high score because it shows that she has available credit but she doesn’t need to use it all. By comparison if Margaret charged the full $2,000 then she would have no credit remaining which would show that she might be in a bad financial spot because she’s using all of her credit.
Every time you apply for a new credit card or a new loan it drops this section of your score. However, getting new credit can increase this section of your score because it means that you are financially responsible. How long you have been financially responsible is another consideration, so the longer you have a single credit card that you use and pay regularly, the better it looks for potential lenders because it shows that you are responsible with money long-term.
Checking your credit score officially through one of the three bureaus falls under this category. You would think that as a consumer, knowing what your credit score is and regularly checking that information would be important but in reality every time someone looks into your credit history, you or a lender, it counts against this part of your score. Credit inquiries stay on your report for approximately 2 years.
Your credit mix, or credit variety, is another driver of your score and takes into account the total mixture of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. You don’t necessarily need to have all of these open, but the more you have, the better it looks. This is one of the biggest portions of your credit score because it shows that you can be trusted with lots of types of credit or loans.
Payment history is one of the biggest influences of your score as it is a direct reflection of your ability to satisfy your obligations and indicative of how responsible you are with them. Your payment history is one of the first things that people want to look at when considering you for alone, a job, or house. They want to know that you can make your payments on time. Payment history shows you make on-time payments above the minimum requirement for things like credit cards can really help you. Failing to make timely payments can take months or years to remove from your credit report. If you neglect your payments entirely and end up with a bankruptcy, wage garnishment, or your account sent to collections, that will stay on your credit report for upwards of ten years.
Anyone can run a credit report on you, including landlords, employers, lenders, banks, and so forth. As mentioned, the more times someone runs a credit report on you, the more it drops the New Credit & Length of Credit History section of your credit report.
It is not bad to get a credit report, per se, just be advised that it will hurt your credit score each time you do it. It is better for you to use a third party service like Credit Karma to check on your score with a snapshot look, which won’t impact the New Credit & Length of Credit History part of your score.
Equifax is the one used most often and is considered by some to be the most accurate.
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