How to read a credit report
Everybody needs some kind of financial assistance to make their dream become true. One of the best ways to do this is by getting loans or by using credit cards. However, to get loans or use credit cards, you will need a good credit score. And how can you get a good credit score? It all starts with understanding your credit report.
Understanding what credit reports are is a very important first step in managing your credit and your credit score. And it can be hard for beginners to understand how credit reports work as it can get confusing with all the technical terms. So, we're here to help you understand everything there is to know about credit reports. Let's find out how credit reports work!
What is a credit score?
Before we learn about credit reports, we need to understand what a credit score is. A credit score is a number that lenders and financial institutions like banks use to evaluate your creditworthiness. It ranges from 300-to 850, and the higher your score is, the better. Many factors go into calculating your credit score, but the most important ones are your payment history and how much debt you have.
Your payment history is a record of whether you've made your payments on time or not. It accounts for 35% of your credit score, so it's the most important factor. If you've missed any payments, it will negatively impact your score.
The second most important factor is your debt-to-credit ratio, which is the amount of debt you have compared to the amount of credit you have available to you. It accounts for 30% of your score. The lower your debt-to-credit ratio is, the better.
Other factors that go into calculating your credit score are the types of credit you have, how long you've had credit, and whether you've applied for new credit recently.
What is a credit report?
Now that we know what a credit score is, let's learn about credit reports. A credit report is a record of your credit history as it includes information about your payment history, the types of credit you have, and whether you've been late on any payments. It also includes your personal information like your name, address, and SSN (Social Security number).
You are entitled to one free credit report from each of the three major credit reporting agencies - Experian, TransUnion, and Equifax - every year. You can request your free credit report online at AnnualCreditReport.com.
It's important to check your credit report regularly to make sure that all the information is accurate. If you see any errors, you can dispute them with the credit bureau which will solve them shortly.
What are trade lines?
Trade lines are accounts that appear on your credit report. They can be either positive or negative, depending on your payment history. Positive trade lines will boost your score, while negative trade lines will hurt it.
There are two types of trade lines: installment accounts and revolving accounts.
Installment accounts are loans that you pay back over a set period, such as a mortgage or a car loan. Revolving accounts are lines of credit that you can borrow from, up to a certain limit, such as a credit card.
Your payment history is reported on your trade lines. If you've made your payments on time, it will be reflected positively on your score. However, if you've missed any payments, it will be reflected negatively.
What are Inquiries?
Inquiries are requests for your credit report. They can be made by lenders, employers, or landlords. Inquiries are mainly divided into two types: hard inquiries and soft inquiries.
Hard inquiries are made when you apply for new credit and they can stay on your credit report for up to two years and will ding your score by a few points.
Soft inquiries are made when you check your credit report or when an employer checks your credit as part of a background check. They don't impact your score.
What are public records and collections?
Public records are items that appear on your credit report that can negatively impact your scores, such as bankruptcies, foreclosures, or tax liens.
Collections are any unpaid debts that have been turned over to a collection agency. They will also appear on your credit report and can hurt your score.
Both public records and collections can stay on your credit report for up to seven years.
How does all this affect my credit score?
All of the factors we've discussed - payment history, debt-to-credit ratio, inquiries, public records, and collections - will affect your credit score. Let's find out how:
1. Payment history: As we mentioned earlier, payment history is the most important factor in calculating your credit score. If you have a history of making late payments, it will negatively impact your score.
2. Debt-to-credit ratio: The second most important factor is your debt-to-credit ratio, which is the amount of debt you have compared to the amount of credit you have available. A high debt-to-credit ratio will hurt your score because it shows that you're using a lot of your available credit.
3. Inquiries: Inquiries are divided into two types and they are hard inquiries and soft inquiries. Hard inquiries can stay on your credit report for up to two years and will ding your score by a few points. Soft inquiries don't impact your score.
4. Public records and collections: Both public records and collections can stay on your credit report for up to seven years. They will negatively impact your score during that time.
So there you have it! In this article, we've talked about the different factors that affect your credit score. We've also discussed how you can get a free credit report and what to do if you see any errors on it. Finally, we've talked about how all of this affects your credit score. Both credit reports and credit scores are very important in your financial life. Be sure to check them often and keep an eye out for any errors.