Credit Reports and Credit Scores

Credit reports and the three bureaus

A credit report is a record of how you have borrowed and repaid money. It is built by companies called credit bureaus. Three of them cover the whole country: Equifax, Experian, and TransUnion.

Lenders, credit card companies, and others report your activity to the bureaus. Because not every company reports to all three, your three reports can differ a little.

A credit report contains:

• Identifying information: your name, address, Social Security number, and date of birth.

• Credit accounts: credit cards, auto loans, student loans, and mortgages, with the opening date, credit limit or loan amount, balance, and payment history.

• Public records and collections: accounts sent to collections and bankruptcies.

• Inquiries: a list of who has looked at your report.

Notice what is not in your report: your income, your bank balance, or your race, gender, or religion.

Who looks at it? Lenders deciding whether to approve you and at what interest rate, landlords checking whether you pay rent on time, some employers (with your permission, and they do not see your score), and insurers, who may use it to set premiums in many states.

Credit scores and the five FICO factors

A credit score is a number that summarizes your credit report. The best-known is the FICO score, and it ranges from 300 to 850. Higher means you look like a lower-risk borrower.

These labels are approximate and vary by lender. A FICO score is built from five factors. The weights are approximate:

1. Payment history (about 35%). Do you pay on time? One payment 30 or more days late can hurt.

2. Amounts owed (about 30%). Mostly your credit utilization, explained below.

3. Length of credit history (about 15%). How long your accounts have been open and their average age.

4. New credit (about 10%). Recently opened accounts and hard inquiries.

5. Credit mix (about 10%). Having different types, such as cards and installment loans.

Memory aid for the order: Pay All Loans Not Mistakenly, meaning Payment history, Amounts owed, Length of history, New credit, Mix.

Why these weights? Lenders mainly want to know two things: will you repay (payment history), and are you stretched too thin (amounts owed)? The other factors are weaker clues.

Credit utilization

Credit utilization is how much of your available revolving credit you are using:

Lower is better. A common guideline is to stay below 30%, and people with the highest scores often use under 10%. Utilization belongs to the amounts owed factor.

Inquiries: soft versus hard

An inquiry happens when someone looks at your credit report.

• A soft inquiry does not affect your score. Examples: checking your own score, a "pre-approved" offer from a card company, an employer's background check, or an insurer's quote.

• A hard inquiry happens when you apply for new credit and the lender pulls your report to decide. Examples: a credit card, auto loan, mortgage, or often an apartment application. It can lower your score by a few points for a while, and it stays on your report for about two years.

Why does a hard inquiry matter? Several applications in a short time can signal that someone is desperate for money, and each new account also lowers the average age of your history. The exception: rate shopping for one auto loan or mortgage within a short window is usually counted as a single inquiry.

Checking your reports and disputing errors

You have the right to a free copy of your credit report from each of the three bureaus, available weekly at AnnualCreditReport.com, the only site authorized by federal law for this. Be careful with look-alike sites that ask for payment.

Reports can contain mistakes, such as an account that belongs to someone else (which can also be a sign of identity theft), a payment marked late that was on time, or a debt listed twice. To dispute an error:

Why scores matter and how to raise yours

A good score can mean a lower interest rate on a car loan or mortgage (saving thousands of dollars). For example, on a $\$20{,}000$ car loan, a rate of 6% instead of 12% saves roughly $\$1{,}000$ per year in interest at the start, and several thousand dollars over a 5-year loan (illustrative rates, not official figures). A good score can also mean approval for an apartment without a bigger security deposit, and sometimes lower insurance premiums. A low score can mean denial or higher costs.

Here is how each group uses your credit report:

• Landlords look for late payments, collections, and past debts to judge whether you will pay rent on time. A weak report may mean a denied application, a larger security deposit, or a co-signer.

• Employers (with your written permission) may see a version of your report without your score. They look at your payment history and any collections, mostly for jobs that involve handling money. Employers cannot get your report without your permission.

• Insurers in many states use a credit-based insurance score, drawn from your report, to help set auto and renters insurance premiums. A better report can mean a lower premium.

• Lenders use your report and score to decide whether to approve you and what interest rate to charge.

Ways to raise a score, tied to the factors:

• Pay every bill on time. Set up automatic payments for at least the minimum. This improves payment history, the biggest factor.

• Lower utilization. Pay down balances, or ask for a higher limit if you won't spend more.

• Keep old accounts open when they have no fee, since they lengthen your history.

• Apply for new credit only when needed, to limit hard inquiries.

• Build a history if you have none: a secured card, a student card, or becoming an authorized user on a parent's account.

Raising a score takes time. Late payments fade slowly, and a long history can only be built year by year.

Back to the start: the landlord checks Emma's report to see whether she pays what she owes. With little history, she can build credit by using a student card for small purchases and paying it in full every month.

Summary