If you feel like you need a translator to interpret your credit reports and scores, you are certainly not alone. Yet while most people are not “fluent” in credit, your lenders are. This means that for you to make informed credit decisions, you need to be able to decipher what’s on your reports and understand what your credit scores are telling lenders about you – and why.
Your credit file is created the moment you have your first transaction with a creditor – and it follows you throughout your life. The three major credit bureaus, TransUnion®, Equifax® and Experian®, collect and maintain the data in your credit file that gets reported by your creditors. It shows how well (or poorly) you manage your credit accounts, also known as tradelines. The credit bureaus then provide this information in the form of a credit report to potential lenders, etc., when authorized. Your credit score (or credit rating) is calculated based on information in your credit reports. When you apply for credit or a loan, lenders use your credit scores to determine whether you qualify, your interest rate and your credit limit.
People with little to no credit history are said to have a thin file. This means the credit bureaus do not have enough data or loan repayment information to generate a credit score. If you’re just starting out, or starting over, and need to “beef up” your credit file – apply for credit that is typically easier to acquire, such as a retail or gas card.
Credit scoring models are statistical formulas used to calculate your “risk level” of default on a debt when seeking mortgages, vehicle loans, personal loans and credit. This risk level is translated into a credit score. The higher the score, the more favorably you are viewed by lenders. There are numerous scoring models – and each is adjusted to assess specific risks based on the industry and type of loan/credit you are seeking. For example, a mortgage lender will have different risk criteria than a credit card company or auto lender.
If you have a significant history of delinquencies, bankruptcies or collections, you are likely to be categorized as high risk – indicating to lenders that you are more likely to pay late or default on debt. This means that if you can even get lender approval, you will probably pay a much higher interest rate to offset your high-risk level. On the other hand, if you have responsibly managed your debt and your credit rating reflects that, you may be considered a prime borrower – which is exactly who lenders want. Prime borrowers are typically easier to approve and enjoy much lower interest rates.
The discussion of personal information in the credit scores and reports space refers to your name, aliases, date of birth, current/previous addresses and social security number. You may see current and previous employers listed on your reports if a lender provided such information when reporting on a credit account opened in your name. While this personal information does on your credit reports, it does not affect your credit scores. It is only used for identification purposes.
Other information that has no impact on your credit scores and you should NOT see on your credit reports includes your gender, race, religion, national origin, marital status, political affiliation, medical history, criminal record, salary or other compensation, occupation and whether you receive public assistance.
Credit obligation is an agreement by which you are legally bound to repay money that you have borrowed. Lenders assess how well you manage your credit obligations, or outstanding debt, by looking at your Payment History. Your payment history contains the Account Status or Pay Status – and makes up 35 percent of your credit score.
If you are responsible and make your payments on time, your Open Accounts (active tradelines) will display these types of status comments: Paid-As-Agreed, Current or Never Late. If, however, you tend to pay late at times, your status may be Delinquent, a term to describe an account on which a payment is 30, 60, 90 or 120 days past due.
Other negative comments include: Collections, Settled, or details such as Paid, Was 30 Days Late. If an account has been Charged Off, meaning it is deemed uncollectable by a creditor – that will also be noted on your report along with the charged-off amount. However, by law, late payments, tax liens and other negative information should drop off your credit reports in seven to 10 years.
Keep in mind that your credit reports are only as accurate as the information provided to TransUnion, Equifax and Experian by your creditors – and “misinterpretations” do happen. Monitoring for account changes, late payments and unauthorized activity can help prevent your credit scores from getting lost in translation.