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The Complete Guide to Understanding Your Credit Report: What Factors Affect Your Credit Score

The Complete Guide to Understanding Your Credit Report: What Factors Affect Your Credit Score



How to Start Improving Your Credit Rating This Month

A credit score is a number that reflects your credit history. Today we will be taking an in-depth look at credit scores. Understanding your credit report can feel overwhelming, but we can make it simple to understand. Whether you want to improve your credit, or learn more about how credit works, you have come to the right place. We will be looking at the definition of a credit score, how credit reports are used, and what a good/bad credit score is. We will also look at why credit scores are important and how they are calculated. Finally, we will look at ways to improve your credit score. 

Hopefully with this guide you will feel confident in understanding your credit score report. If you want to improve your current credit score, you will have multiple options on how to work on improving it. Credit scores are important. They can have a big impact on the finances you can access. It can be the difference between getting approved for a credit card, car, or home.

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Credit score definition 

A credit score is a number that reflects your credit history. It may only be three numbers, but it can say a lot about your past loan history. It looks at your loan and credit history and shows your credit health. It can give lenders an idea of how likely you are to pay off a loan. A higher number shows that you have a good history of paying back your loans and managing debt well. A lower score shows that you do not have the best history of paying back loans on time. Most creditors and loan agencies are looking for a higher credit score.

There are many different types of credit scores. Today, we will look at the two most popular ones: the FICO score and VantageScore. When you think of your credit score, you usually think of your FICO score. In fact, that is the credit score that we will be focusing the most on today. Most companies look at your FICO score, so we will focus on that. We will, however, discuss the difference between the FICO score and the VantageScore a little later.

Your credit score number can range anywhere from 300 to 850. That number is determined by many factors. It considers the amount of credit you have out, what your payment history looks like, and how many accounts you have. Of course, sometimes life happens, and your credit score is hurt. There is no shame in having one credit score or another. The only issue is that having a good credit score can open more loan and credit opportunities. Remember that having access to loans is a good thing. Almost everyone has debt of some type. You need loans to buy a house, car, or get a credit card. Your credit score is vital to determining if you get approved for a loan. Keep reading to learn more about how you can work on improving your credit report, regardless of your current score.


Understanding your credit report 

Your credit report is an ongoing display of your behavior with credit. It looks at credit information provided by financial institutions. Your credit card company, home and auto loan providers, and bank, all share information on your debt. Your report can also reflect your utility payment history. There are several credit bureaus that report your credit activity. However, there are three main companies that matter the most. That information goes to the credit bureaus. The three main credit bureaus are Equifax, Experian, and TransUnion. Each bureau has a score for you. Those three scores combine to determine your FICO score. Along with your score, your credit report may have other information as well. It may show your name, date of birth, social security number, and address. Your credit report does not display your employment history or day-to-day purchases.

When applying for credit, creditors will take a look at your report. Your credit report number will tell them how likely you are to pay back a loan. Creditors are trying to determine your creditworthiness. The better your credit report, the better chance you have at getting approved. 


How is your credit score calculated? What factors affect your credit score?

The majority of the information on your credit score comes from the credit bureaus Equifax, Experian, and TransUnion. All year round, credit agencies and financial institutions are sharing information with these three credit bureaus. They are providing information on who is paying back their loans, who is applying, and more.  All of your financial institutions report your credit information to the credit bureaus.

Here is a good list of some information they report:

  • Account balance details
  • Amount borrowed
  • Amount paid
  • Status of your account
  • If you apply for debt

This list is not all-inclusive, but it contains a lot of the main information they send. You are likely wondering which of the factors impact your credit score the most. We will cover that next.

Your payment history impacts it the most. It shows how well you are about making consistent on-time payments. Since this shows your payment history, it is one of the biggest influencers for your credit score. One or two late payments can hurt your score. Having multiple late or missed payments could cause lasting damage. Paying your bills back late, or not at all, are two of the fastest ways to hurt your credit.

The next most important factor is credit utilization, or debt-to-limit ratio. This ratio looks at the limit of your credit and compares it to how much debt you actually have. For example, if your credit card has a max of $5,000, how much are you actually borrowing? Only taking out $1,000 at a time and paying it back would look better than taking out the full $5,000. The lower the number, the better. The idea is that you are living within your means, or that you are not only relying on credit to make payments. If you are looking for that magic number, many experts recommend keeping the ratio below 30%. The good news is that you can improve this number either by increasing your credit limit or paying down debt.

Next is age of credit. This factor shows how long you have had credit in your name. It looks at how long you have had debt, as well as the age of specific accounts. Along with looking at how old your account is, it also looks at how much time has passed since you last used your account. Having a longer credit history will improve your score. If you find that you can manage your credit pretty well, you might want to consider not closing credit cards. Instead, you might want to consider keeping your first credit card open and just occasionally making small purchases with it here and there to keep it active.

The fourth factor on this list is credit mix. This factor does not impact your score nearly as much as payment history, credit ratio, or age of credit. This looks at how many different types of accounts you have. Do you have credit cards school debt, auto loans, mortgage, and other types of credit? Surprisingly enough, having multiple types of credit accounts can improve your score. Having active accounts shows that many lenders have approved you. It also shows that you can pay off multiple loans at the same time.

Credit inquiries affect your score the least, but you should still be cautious because it can sneak up on you. The good news is that you do not have to worry about every credit inquiry. There are two different types of inquiries, and only one affects your score. Hard inquiries are from financial institutions (like a bank or credit card company). The companies submit a hard inquiry when you apply for a loan with them. The other type of inquiry is a soft inquiry. This is when a non-financial institution company looks at your credit report. These companies need to see your report as part of their background check. Often times, potential landlords and employers will submit a soft inquiry. They want to check that you are the person you say you are and that you are able to pay your rent on-time. Soft inquiries are fine and do not affect your credit score. Hard inquiries when applying for credit do impact your score. That is why it is not a good idea to blindly apply for loans that are likely to deny your application. When you apply with a lot of places, they all submit credit inquiries, which hurts your score. Inquiries might only affect your score by a couple points, but it can add up quickly. This means that the next company to do a credit inquiry will see an even lower score. When you have a lot of hard inquiries, it looks like you are desperate for money.


The difference between the FICO score and VantageScore 

FICO has been the more popular credit score for years. However, VantageScore is also growing in popularity. For the most part, the difference between these scores will likely not affect you, but they can both help with different needs and goals. Overall, there are pros and cons to both scores Which score you, or others use, is up to the individual, but for now we will list some of the similarities and differences.

FICO collects your credit scores from the three credit bureaus and then analyzes it. VantageScore looks at consumer credit files instead to build your score. Both types of scores use the same range of numbers. Their scores range from 300 to 850. If you do not have a of credit history, you might want to keep a closer eye on your VantageScore. FICO requires a good six months of information. The VantageScore only needs a month of credit history. You could have a VantageScore before you have a FICO score.

The two scores both decrease when you have missed or late payments on accounts. The difference though is that FICO ranks all late payments of equal importance. VantageScore ranks some late payments as more important than others. For example, a late mortgage payment is penalized more than others. The tradeoff is that FICO and VantageScores look at collection activity differently. Having an account go to collections can hurt your score. However, FICO ignores collections that had an original balance less than $100. VantageScore does not dismiss these.

Another difference comes from credit inquiries. We talked earlier about hard checks and soft checks to credit. A lot of times, when you apply for an auto loan, your application is sent to several lenders over the course of a few days. Rather than dinging your score with each of these checks, the credit companies only ding your credit score once so long as the hard checks are only within a few days of each other. The difference though is that FICO has a 45-day window and VantageScore has a 14-day window.


What is a good credit score? What is a bad credit score?

Credit scores go on a range. Every item that requires a credit score will have a range that they want. Of course, as we have mentioned earlier, there is no shame in one credit score over another. Certain ones will open more doors. Other credit scores may mean you are denied on more applications.

Credit scores range from 300 to 850. They also range from being ranked as poor to excellent. Below we have the average FICO score range.

  • Excellent: 800 to 850
  • Very Good: 740 to 799
  • Good 670 to 739
  • Fair: 580 to 669
  • Poor: 300 to 579

Please remember that your credit score ranking is not a reflection of you. It is only a reflection of your credit history. You may be a great person, but your credit score might be ranked as poor. It just says that you do not have the best history of paying back debts or might be swimming in credit card debt.

Knowing the ranking system is only one part of the equation. You probably want to know what your credit score looks like in the big picture. You might want to know what score you need for credit applications. If you have an excellent or very good credit score, you are more likely to have access to great loans and great loan rates. There are credit card companies that work with many different credit score rankings, but their offers may change from ranking to ranking. You might also be wondering how your score ranks in comparison to others. Did you know that about 30% of Americans have a credit score of 600 or less? So, if you are credit score is sitting in the fair or poor ranking, do not fret. You are not alone.

Using numbers for your credit score can provide a lot of information in one glance. For example, it could alert you that your identity might have been stolen. If your credit score seems off, too low or too high, be sure to look over your report. Look for inaccurate information. It might be affecting your score.

If you need money and are struggling to get approved, consider a payday loan. These no credit check loans can help during difficult situations. They are great for people with no credit or bad credit. They are simply here to provide financial relief to those who need it. We know life happens, so regardless of your credit history, if you need a small loan now, you can apply at Net Pay Advance


Why is your credit score important? 

Your credit score does a lot. It can help you get approved for loans. It can help you get approved for other forms of credit like a mortgage or an auto loan. If you want a credit card, that company will have to check your credit score. Lenders will check your score to see what your credit history has looked like over time. They will use that information to determine your likeliness of paying off debt with them. It is not just lenders and financial institutions that look at your credit score. Other companies look at your score as well. If you are applying for an apartment or a cellphone contract, they may need to check your credit score too. A lot of times these companies will check to make sure you are likely to make on-time payments with them. Employers will also look at your credit score. Sometimes they check as part of their background check to make sure that you are the person you say you are.

Not only will your credit score determine if you are approved for a loan, it can also affect the amount you pay. If your credit score is not the best, you might have to pay higher interest rates. If your score is better, you might qualify for better credit card deals. This may mean having access to cash back programs, lower APR, or even airline miles. Having a very good or excellent credit score can really help open doors. Having a fair or poor credit score can make life difficult. Credit scores are incredibly important when it comes to getting approved for credit or loans.

One common question we hear a lot is if a payday loan will affect your credit score. The short answer is no. The long answer is it only will affect your score if you do not pay and your debt goes to a third-party collection agency. Even then, it will only be reported if that third-party company chooses to report it. At Net Pay Advance, we do not look at your credit score when you apply. In return, we do not report your payment history. For a more in-depth explanation, check out our super helpful article on the subject www.netpayadvance.com/Frequently_Asked_Questions_About_Credit_Scores.

If you want to build up your credit, it is possible. There are several ways to improve your credit score. Some of the advice we provide in the next section will work for people, regardless of their current credit score. Others will require a fair to good credit score to work. 


How to start building credit 

Patience may be a virtue, but when it comes to building your credit, it is a necessity. Building credit takes time. Make sure to start before you really need it. Having a good rating is important if you are going to apply for a credit card or loan. Have you paid your bills on time? Have you paid back your bills in full? How many other debts do you have active? 

Not sure how your credit score ranks?

Having a higher score allows you to access better credit cards and loans. These tend to have a lower APR (Annual Percentage Rate), lower interest rates, and even better perks. Alternatively, people with a lower score may find that they are often denied for loans and credit cards. If they are approved, it is usually for less favorable rates, costing them more in the long run.

If you want to have access to better auto loans, mortgages, and credit cards in the future, then you need to start building today. Thankfully, there is a number of different ways to build (or improve) your credit!


Open a card to increase your credit

When managed properly, credit cards can be a great tool to build your credit. It can help show that you are responsible and can be relied on to pay back your debts. If you have little or low credit history, look for a card with a lower spending limit. It is usually easier to qualify for these cards.

If you mismanage your credit card, you could easily fall into debt and hurt your score. When you are late to pay your credit card, you will owe even more money, and your score will lower. The additional money that you owe will be based on your card’s APR. You can avoid this. Once you are approved for a card, use it to make some of your regular purchases like gas or groceries. Credit card purchases should be treated as a bill, not as additional money. Always make sure that the purchases are small, and that you can easily pay them off right away. Make sure to pay it off in full every month. Be responsible with your credit card and keep a close eye on expenses. Pay attention to receipts, credit card statements, and bank accounts to make sure that you do not purchase more than you can pay.


Easily open a secured card to increase your credit score

of the money in your account. This type of credit card is great for people with little history or negative history. Besides being tied to your bank, and having a lower limit, secured credit cards are the same as regular ones. You still need to make sure you are using the card responsibly. You still need to pay off the bill on time each month.

Before opening a secure credit card, be sure to check with the company to find out if they report your credit. Not all secured credit card companies will impact your credit history. If you are trying to build credit, you want a card lender that will report your responsible behavior.


Open a joint account or become an authorized user to increase your credit rating

Fortunate enough to have a family member that is comfortable with you joining their account? That is a great way to build your score fast. You could become an authorized user on an account, or you could open a joint account, with someone with a better credit score. 

Not everyone will be comfortable having you join their account. With having a shared account, both users are responsible for repaying the charges. The other user may become liable for your purchases.  You could become liable for their purchases. If no one pays the credit card bill, you may both take a critical hit to your score. The Simple Dollar has more information on the differences between adding authorized users and opening a joint account. It also goes over the pros and cons of using both. 

Consider becoming a user on a card that you cannot physically access. This helps you avoid temptation entirely from spending the card. You just have to be sure that the other person will be responsible about their purchases.


Pay off your current loans for a quick boost in your credit

If you have an auto loan, mortgage, or school loan, you will want to be sure you are making regular on-time payments. These loans are all monitored and report your credit with them. School loans are common. Almost everyone who went to college has at least some form of student loan debt.

Auto loans are one of the easiest types of loans to obtain. They also tend to have high interest rates and difficult terms. This means they tend to be one of the most difficult loans to repay. When buying a car, you must shop for both a reliable car as well as an auto loan. Having a lower interest rate on your auto loan can put you in a stronger negotiating position when purchasing the car. Of course, there are tons of auto loans out there. NerdWallet has collected a list of auto loans for people with good, fair, and bad credit

If you have trouble paying off your loans, consider enrolling in autopay. A lot of companies have an automated system that will schedule a monthly withdrawal from your bank account. You can set it up to withdraw the same amount of funds on a specific day of each month. If you are going this route, make sure that you are confident you will have the funds necessary. The last thing you want is to miss a payment and have an overdraft fee


Avoid identity theft by keeping your information secure

According to one study, about 30% people will experience identity theft. With identity theft, someone could drain your bank accounts, and lower your score by taking out credit cards in your name. There are steps you can take to help avoid identity theft.

Set up transaction alerts with all of your bank accounts and credit cards. You will be notified any time a transaction takes place. You can also use services that monitor your credit. Credit Karma offers this service for free. Be cautious who you give your personal information to and never respond to unsolicited requests. Avoid clicking dangerous links by hovering your mouse over a link in order to see the destination URL. Never use or access your sensitive information while on public Wi-Fi. Shred unneeded documents that include your personal information and cut up closed credit cards. Keep your social security card in a safe place where you will not lose it, or have it stolen. Create strong passwords by using different ones across multiple websites. Check your score about once every four months and dispute any concerns you notice.


Pay your other bills on time to show credit bureaus that you are responsible

Do you have a history of paying your utility and cellphone bills on time? Some credit bureaus will allow you to connect your bank accounts to identify your payment history. Previously the only way that utilities could affect your score was in a negative way. Unpaid utility bills that you default on could also lower your score. Experian offers Experian Boost to help you include monthly bills in your score. This tool will only affect your Experian report. It will not affect your Equifax and TransUnion credit reports. However, your Experian score does affect your FICO score.


Bad scores happen. Most people have some sort of rough period in their life. They may have made a mistake, or even just had some bad luck. Regardless, they want to grow and improve their credit score now. If you have a low score, there is no reason to feel ashamed. You are not alone. According to one study, about 33% of Americans have a credit score that is below 601. You should still work to improve your score.

Hopefully, this guide did a great job of answering any and all of your credit-based questions. However, we realize that nothing can be completely all-inclusive. Do you still have a question about credit? Feel free to leave a public comment below and we will be sure to answer. 

This blog was originally posted September 29, 2019 and has since been updated.


Monday, July 13, 2020
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