Learn what information goes on in your credit report, how credit scores are calculated and how banks use credit history reporting systems to make lending decisions.
Your credit score—a three-digit figure that encapsulates the entirety of the US credit reporting system and decides whether you’ll be granted a loan or a credit card—is displayed along with the six main components that make it up.
Paying your bills on time, having a variety of accounts (including credit cards and loans), and maintaining these accounts in good standing for many years are the keys to having a strong credit score.
However, have you ever wondered how credit operates? Why exactly do you need a credit report?
1-We have credit records and ratings for what reason?
Banks can avoid lending money to customers who are already overextended or who have a history of not paying their bills by using the credit history reporting system.
In the past 100 years or more, banking was a relatively private activity. If you needed a loan, you would have to visit a nearby bank and persuade a loan officer to grant you one face-to-face. You would have had to provide work documentation and, maybe, personal references who might attest to your moral character.
The majority of lending at the time required collateral, therefore obtaining a loan required you to do so. A home mortgage, in which the bank acquires an interest in the property, is the most. typical form of a secured loan.
Since then, unsecured financing has become widely used due to the development of credit cards as a practical, electronic purchasing tool. Unsecured lending is also quite dangerous because there is no collateral the bank can seize if the borrower defaults on the loan, even if it may be more profitable for banks.
The credit report system was developed as a result to provide banks with a single source of data about potential borrowers.
2-Since when does credit history reporting systems begin?
Banks started working together to share client credit information, such as account balances and payment histories, in the late 1950s and early 1960s.
These first “credit bureaus” were modest and restricted to specific localities. But by 1970, a few sizable businesses began to take the lead in credit reporting. The three credit bureaus we are familiar with today are TransUnion, Experian (with participation in Experian CreditWorksSM), and Equifax, which are descended from these businesses.
The Fair Credit Reporting Act (FCRA), which Congress initially passed in 1970 to control how credit reporting firms handled consumers’ personal information, was still in its infancy compared to the in-depth reports we have now. Early in the 1980s, credit bureaus started storing our credit reports’ detailed personal information (such as Social Security numbers, residences, and dates of birth) as well as the loan, inquiry, and payment information online.
3-What details are included in your credit report?
Your credit report includes information on your borrowing history, including loan applications, balances, and payment histories, as well as personal identification data, including your name, address, and Social Security number.
Your report can include details about former residences and jobs in addition to your name, Social Security number, and birthdate. Even with all of this distinctive information, credit report mistakes are still rather typical, particularly if your last name is a popular one like Jones or Brown.
Detailed information about current behaviour on your bank accounts is mostly found in your credit report. This comprises:
Whenever you seek for credit, regardless of whether you are accepted.
The bank, the loan amount, the date you applied for the loan, the amount of your monthly payments, and your payment history will all be included in the data.
3.Establish revolving accounts:
Your credit cards are listed here. The bank, your credit limit, the time you created the account, your payment history, and the account balance as of the last statement date are among the details.
4. Account closures:
Even if an account is canceled, it may still appear on your record for up to seven years.
5. Receivables accounts:
Your credit report will reflect this account if a bill of yours is sold to collections. Even if the initial debt, such as a medical bill, wasn’t reported to a credit bureau, it is still possible for this to occur.
6. Public documents:
These consist of court verdicts, tax liens, and bankruptcy filings.
You have the option to add comments to your credit report from credit bureaus to describe records. Additionally, creditors may comment.
Your credit score is one thing that is missing from your credit report. Your credit history will be tracked by the credit report. The information is used to determine the score.
4-What does your credit report do for banks?
The information in your credit report is now used by businesses to generate credit scores, which most lenders will utilise in their underwriting rather than manually examining your credit file.
However, when you apply for a larger loan, such as a mortgage, or in situations where your credit score is “on the fence,” an underwriter will likely look at your credit report more carefully.
Your credit may also affect whether your loan is approved and how much you pay for credit. The bank will charge you less interest for the loan if your credit score is higher.
Who cares? Well, if you want to save money, you should. On a $250,000, 30-year mortgage, for instance, the difference in total interest payments between a 5% interest rate and an 8% interest rate is almost $179,000. That is the price of having bad credit.
Your credit score may occasionally be used by businesses for other purposes as well.
When applying for a job that requires financial responsibility or renting an apartment, for instance, you could be required to submit to a credit check. (A few firms have expanded the usage of credit checks during the employment process. Although I believe that practise to be of dubious usefulness, it is just another reason to maintain good credit.)
5-A credit score: what is it?
A credit score is a three-digit figure that is produced from the information in your credit report and shows how likely you are, compared to other borrowers, to repay a loan on time.
Under trade names like FICO Score and VantageScore, various businesses generate various credit ratings.
Each of these businesses may have multiple variations of their score for various purposes (for example, one for mortgage lenders, one for credit card banks, another for car insurance companies).
Finally, depending on which of your three credit reports was utilised to gather the data, each of these credit scores may vary. There are three credit bureaus: Equifax, Experian, and TransUnion, all of which are members of Experian CreditWorksSM. There may be discrepancies across the three, despite the fact that the majority of your credit report will be the same.
90% of lenders utilise FICO Scores, which are a widely regarded indicator of whether a loan will be repaid on time. While FICO’s algorithms determine your creditworthiness based on the data in your credit report, other forms of scores merely use payment history to determine your score.
But generally speaking, every credit score lies around between 350 and 900. The stronger your creditworthiness and payment record, the higher your score. Banks will view you as a greater risk consumer if your score is lower.
Read more about How To Obtain A Personal Loan If You Have No Credit
6-A good credit score is what?
You can be sure that a score of 720 is “good” on most scales, while a score of 800 is “very good” on most scales, albeit it varies on whatever score you’re looking at.
You’ll have the best chance of being accepted for the top credit card offers, auto loan rates, and mortgage rates if your score is at least 700.
High 600s scores aren’t always negative, but you won’t be eligible for all loans or the best rates with them. You can still be rejected for a lot of the greatest credit card offers if your credit score is below 700.
Finally, it’s crucial to remember that future improvements won’t help you much after your credit score is in the mid 700s to low 800s. The best prices are currently available from banks. (It’s as if a professor grants an A+ to numerical grades between 97 and 100; if you reach 97, getting a 98 or 99, etc., won’t help you any more.)
7-How can bad credit be repaired?
similar to how you establish good credit! by making on-time payments on your obligations and avoiding (or eliminating) debt.
The only method to “repair” your credit is to pay your bills on time, pay down debt gradually, and refrain from asking for additional credit unless you’ve experienced identity theft or there are other problems on your credit report.
Credit histories Keep track of your credit card and instalment loan payment history.
Based on the information in your credit report, credit scores swiftly summarise your creditworthiness on a scale of 300 to 900; the better your score, the more likely you are to receive the best rates on loans and credit cards.
However, your credit information may also be utilised for apartment rentals, employment screening, and insurance underwriting. Banks use credit reports and scores to determine whether to loan money.
It’s simple to keep your credit score high. Don’t overextend yourself, but yet don’t completely forgo credit. Get a loan and a few credit cards, and pay your bills on time every month.