How Your Credit Report Impacts Your Credit Score


22 March,2016

Many consumers find the credit industry a little confusing. You have a credit report and a credit score, and it isn’t always clear which is which and how each item impacts you.

As you move forward trying to improve your financial situation, it’s important to understand the relationship between your credit report and your credit score.

What is a Credit Report?

Your credit report is a history of everything you’ve done with credit. This includes borrowing and inquiries about borrowing. There might be other information in your credit report, such as who your employer is and your address. However, not all the information in your credit report will impact your credit score.

Not only does your credit report have information about your loans, but it also provides information about how you have paid them. If you are late making loan payments, it might be reported to a credit bureau and included in your credit report. The more late payments you have, the more negative the impact is. The information about your loans will also include your original balance and how much you still owe. In the case of credit cards, considered revolving credit, the information provided allows people looking at your credit report to determine how much of your available credit you are using.

Other items might also appear on your credit report. Even though it isn’t debt, you might find that missed payments to a landlord or utility company are included on your report. This is especially true if one of your accounts has been turned over to collections. If you have to set up a payment plan to cover medical expenses, that might also be reported as a loan. That can appear on your credit report, although medical debt doesn’t carry the same consequence as other types of debt.

Your credit report will also include information about the types of that you have, like installment payments (car loans, mortgage) and revolving credit (credit cards, home equity line of credit). Lenders like to see a good mix of loan types. They like to know that you can make regular payments on large purchases, as well as being able to manage revolving credit where what you owe changes.

The credit report will also show how long you have had each loan so that it is easy to see how long you have been managing your loans. The number of times you have applied for credit will also be shown. When you check your own credit, or when a marketer checks to see if you qualify for an unsolicited offer, your score won’t be affected. However every time you apply for a loan, that is recorded and can affect your overall credit picture.

It’s a good idea to check your credit report for errors. You don’t want a lender to think that you are irresponsible because of a mistake.

What is a Credit Score?

Your credit report is a detailed look at all of your credit interactions. Pretty much everything about each of your loans, from when you make your payments to how much you owe to how long you have had each loan, is included in your credit report.

Your credit score, on the other hand, is a summary of all the applicable information in your credit report. Using algorithms, credit scoring models take the information in your credit report and turn it into a single number.

It is important understand, however, that even though we talk about a “credit score”, the reality is that we all have several scores. There is no one algorithm that figures your score for every situation. The most widely used company is Fair Isaac Co. score or FICO. Even with FICO, however, there are different scores. And different companies might use different variations of the scoring algorithm, or use their own algorithm altogether. It’s important to understand that the score you see with one company or credit agency might not be the same score as you see with another.

You should also understand that your credit score, no matter which scoring model is used, is based on the information that is in your credit report.

The Information in Your Credit Report Determines Your Credit Score

Just as there are different credit scores, you also have different credit reports with different companies. The three major credit reporting agencies in the United States are Experian, TransUnion, and Equifax. You might have other consumer reports compiled by different companies that show different information, such as prescription drug use or reports by companies like LEXIS-NEXIS. For the most part, however, your credit score will be based on the information found in at least one of the credit reports from the three major bureaus.

All of the information in your credit report is assigned a numeric value. You should realize that these values are weighted. For instance, information related to how you pay your bills is weighted more heavily than the length of time you have had credit. If you mess a big payment, such as your mortgage payment, it will count more heavily against you and impact your credit score more, than the fact that you have been dealing with credit for at least a decade.

Another highly weighted item is how much of your credit you currently use. Your payment history accounts for approximately 35% of your FICO credit score. The amount of your available credit that you are using accounts for about 30% of your credit score. As you can see these are both very important factors. If you have a total available credit of $10,000 and you have $8,000 worth of things charged on your credit cards, you are using 80% of your credit availability, And that is considered very negative. If it appears that you are using a large amount of your credit, it can drag down your score even though you don’t have very many hard inquiries asking for credit listed.

Even types of accounts can matter in your credit score. This goes beyond just whether something is a revolving account or an installment account. If you have a department store credit card, it is not rated as highly as having a major bank credit card. Likewise, a payday loan is not going to help you very much, even though it is an installment loan like a car loan. The algorithm takes into account these types of items and the types of loans that are considered more desirable than others.

Different credit scoring models weight various items differently. For example, the VantageScore, which is a different model from FICO, has seven different broad factors that it considers, while FICO only looks at five. No matter the model, though, the rise factors have smaller divisions within them. No credit scoring model is completely transparent. While different scoring models offer approximations of broad factors and how they impact the score, the real details are in the proprietary algorithms and smaller divisions used to get your credit score.

You should also realize that different institutions might tweak a credit scoring model to fit their needs. A tweak might include adding even more weight to mortgage payments or other major loan payments if you are applying for a new home loan. You might also see a difference tweak for consumer type loans, depending on what information data says is especially relevant to the type of loan you are looking for. Thanks to advantages in technology and the data gathering, it is possible for credit scores to be even more nuanced than ever.

When all of the applicable information in your credit report has been assigned a value, it can be plugged into the algorithm and used to determine your credit score. The three digit score that comes out the other side is considered your financial reputation.

What if You Don’t Have a Thick Credit Report?

One of the problems that you might run into is a thin credit file. This is a credit report that doesn’t have a lot of information to form a score. If you have never borrowed before, and if you don’t have any accounts that have been sent to collections, there might not be enough information to assign you a score. Or you might be assigned a lower score based on the small amount of information that is in your credit history.

This can be a problem because many major financial transactions depend upon checking your credit before you can move forward. Well, you might be able to get away with securing a cell phone contract even with a thin file, the reality is that it is more difficult to get a mortgage when there isn’t enough information in your credit report to generate an accurate credit score.

You might also end up paying a higher interest rate when you don’t have a thick enough credit report. You can find yourself getting a car loan, but paying a much higher fee when it comes to your interest. That can cost you a lot of money over the course of the loan. In some cases you are looking at a difference of thousands of dollars.

When you have a thin credit file, it becomes important to try to build a credit history. You can start by getting a secured credit card that will report your activity to the credit bureaus. A credit card is one of the fastest ways to build a credit history because of how often credit card issuers report your payment information. You can also get a small installment loan to help you build a diversity of accounts. Once you start having information recorded to the credit agencies, you will begin to see your credit report grow, And your credit score improve.

There are also alternative credit reporting agencies that can help you start building a credit file. Companies like eCredable allow you to use payments from non-credit sources to establish a financial history. You can’t have an alternative reporting agency contact your landlord, or gym, or your insurance company, or utility company to see how often you pay your bills. This information, although some credit reporting agencies are starting to consider some of it, isn’t traditionally associated with your credit score. This is because these aren’t loans. While they may show that you’re financially responsible and make your payments, they still don’t count as credit.

However, with an alternative credit reporting agency, this information can be used to help you get a credit account with one of the agency’s partners. Unfortunately, because you don’t have a traditional credit report or score, you will likely pay a higher interest rate to begin with. Also, be aware that you will need to pay the alternative consumer reporting agency a fee in order to track down your payment history. Once you are on track to build credit, you will find it easier to qualify for better interest rates and for the loans you want.

Maintain a Good Credit History

Because your credit is so important to your financial health, it is important to maintain a good credit history. This means behaving responsibly with your money. A credit card can help you build good credit history and get the best interest rates on car loans and mortgages. However, if you overspend and do not pay off your cards quickly, they can get you into debt and drag down your credit score.

As you build your credit history, it is important to pay attention to what types of information will appear in your credit report. Pay your bills on time so that you aren’t reported as pay late or missing payments. Keep your debt levels low so it doesn’t look like you are in financial trouble. Be careful about closing your account because you do want to show that you have a credit history. Carefully consider each loan you apply for because you don’t want a lot of hard inquiries on your report.

For the most part, good financial habits translate into a good credit score. But this only happens if you have built a credit file. There are some people who do just fine without using any credit card debt at all. Most of us, though, find that being able to get a loan when it is needed is important. As a result, it is a good idea to think about your credit report and how it looks to outsiders.

Building your credit file should be a conscious effort. It should be a part of an overall financial plan to get the most out of your money. If you are careful and picky about how you manage your money and your credit, you should be able to have an attractive credit report that translates into a high credit score.