The Ultimate Guide to Credit Reports and Scores

Your credit score is one of the most important pieces of information about you, but many people don’t understand theirs. From not knowing what’s on your credit report to being unsure why it matters or how to improve it, if you have questions then this guide is what you’ve been looking for. Here is what everyone should understand about their credit score

Why Your Credit Score Is Important

One of the biggest areas of confusion with credit scores is why they are important at all. The short answer is that your credit score can affect your results in a variety of situations, some of which may surprise you:

  • Financing Options: When you are shopping for financing it’s the same as any other search — more options are better. The higher your credit score on your credit report is, the more offers you will qualify for and the more options you will have to choose from in your search. This will allow you to find the financing option that best fits you and your needs.
  • Better Rates: Having more options is more than just a superficial benefit. Whether you’re applying for a credit card or a long-term loan like a car loan or mortgage, getting lower interest rates can have a huge impact on the total money that your line of credit ends up costing you, so raising your score to lower your rates is a massive benefit.
  • Jobs May Check It: Although some states have protections against employers running credit checks on potential hires, many companies do run checks before hiring an applicant. The belief is that a poor credit score reflects poor decision making, and while this is not always the case, that doesn’t prevent the company from holding a low score against you.
  • Landlords Care About It: Another way having a low credit score can influence your life even when not borrowing is when applying to be a renter. Because landlords want to be sure you will make your monthly rent payments, they may opt to check your credit score before accepting your application.

What Goes Into Your Credit Report

There are six key areas in your credit score, as outlined in this guide to credit reports. Here’s a brief look at what you need to know about each credit score factor, with most indicators tracking the last seven years.

  • Payment History: One of the primary contributors to your score is your payment history. It’s crucially important that you don’t miss payments on your credit accounts, as any payments that are more than 30 days late or missed entirely will appear on your credit report and substantially lower your score.
  • Credit Utilization: Another important indicator is the percentage of your credit that you are using up. Too high is a warning that you are nearly fully leveraged and can severely damage your credit score. Although you can carry some balance on your cards, you should aim to have a maximum of 30-percent, and if you can go lower or pay them off altogether that is better.
  • Derogatory Marks: Major red flags for any creditors are liens, bankruptcies and other derogatory marks on your score as they show a time that you failed to meet your credit obligations. You should seek to avoid these at all costs.
  • Age of History: While having strong scores in the other areas of your credit report is good, if your credit history is too short you may not receive as high of a score as you could because you don’t have a long track record of continuing to maintain your strong behavior.
  • Total Accounts: Similarly to wanting to see a long record of making payments, creditors also like to see that you are being responsible with many accounts, as well, as it shows a more expansive display of reliable payments.
  • Hard Inquiries: As a trade-off to having many accounts, creditors don’t like to see that you have recently opened or tried for many accounts in a short time. The number of hard inquiries on your score in the last two years has a small effect on the score you receive, with fewer inquiries better.

How to Improve Your Credit Score

Once you get your credit report, it’s time to use it to improve your score. If you find any trouble areas you should begin working on them immediately.

  • Always Pay On Time: A track record of making payments on time is a must if you want a good credit score, so your top priority should always be to make all of your minimum payments every month. Even if it may seem better to send the money to pay off a high-interest card over the minimum on a low-interest card, the missed payment will have a serious impact on your score.
  • Lower Your Utilization: Because your credit utilization is such a big part of your score, it’s the best way to quickly improve your score, as well. While it takes a long period of consistent payments to improve your payment history, if you pay off a card, it will improve your score the next time it reports to the credit agencies. Any extra money you have to put towards paying down debt beyond minimums should go to your highest interest card if your priority is raising your credit score.
  • Keep Your Accounts Open: One of the most common mistakes people make with their credit is paying off a troubling card then closing the account in celebration. Not only does this lower your total number of accounts, but if you close a credit card, you just removed all of that unused credit from your utilization calculation so your utilization goes up even though your total debt remains the same.
  • Dispute Any Errors: One of the main reasons every American is guaranteed an annual credit report is to check for inaccurate information. It’s important to dispute any inaccurate information and derogatory remarks on your report in order to raise your score.

Changing your credit score takes hard work but the more you know about it the better situated you are to do so successfully. Now that you know what goes into your score and improve your standing in each factor, you’re ready to start making responsible decisions to raise your score for good!

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