Understanding your Credit Report

If you are feeling confused by your credit report and credit rating and how it affects your family finances you aren’t alone. This is a tough item to tackle even for professionals in the industries that rely on credit scores.

Here are a couple of tips to keep in mind where your credit report and score are concerned.

Example: You are shopping for a vehicle. At the dealership you apply for financing and the Finance manager tells you your credit score is 680. Based on your score you are able to obtain a certain interest rate for your financing. However, you just checked your credit score online and you have a 725. Whose right?

Well both scores are right. And here is why. Every industry that uses credit scores to determine the cost of goods, i.e. interest rates, works with the credit reporting agencies to weigh and factor certain aspects of your credit report that they have determined create the most accurate read for your long term risk, as a borrower.

So automotive financing will have different factors than mortgage lenders, than credit card companies etc. Based on the different factors each industry uses, your score can change by as much as 100 points, all using the same credit report.

Now keep in mind that your score will also be different between the different credit reporting agencies. There are 3 major credit reporting companies, Equifax, Trans Union, and Experian. When you check your score with these agencies, each one will give you a different score.

Some industries use one agency to check credit, while others use all three and take the middle score, such as mortgage lenders. There can be as much as a 100 point swing on your score between each agency.

Is your head swimming yet? What’s more every swing of your score downward has the potential to cost you thousands of dollars in interest. What can you do to protect yourself? Take an active role in managing your credit score.

Things on your credit report that will effect your score:

• How many open trade lines you have on your report
• How long your trade lines have been open; the longer the better
• What is your % of balance to available credit on each of your trade lines
• What is your overall % of balance to available credit on all open trade lines.
• Active use of trade lines; the more you use the higher your score
• Late or skipped payments on open trade lines (this is called derogatory credit)
• Tax liens
• Court ordered judgments ( law suits, bankruptcy)

Here is how to make the most of these factors to create the highest score;

• Have 4-5 open trade lines that have been open for 5+ years having a mix of credit cards, mortgage, and car payment.
• Use your credit cards monthly but pay off new activity each payment cycle.
• If you have to carry balances on your credit cards don’t allow them to be more than 25% of the open line of credit.

Always get your free credit report each year from each agency and make sure that everything on it is accurate, and report any issues to the agency for correction. Also, these agencies can offer a personalized credit analysis for a nominal fee, if you are in the process of rebuilding your credit.

Finally, with so many variables involved with your credit report and credit score, being informed will always be your best defense.