Okay, so remember when we were kids in school and disciplinarians threatened us with the phrase, “This is going on your permanent record!”? Well, as we all now know, that was an empty threat. Nothing we did in grade school has much bearing on our adult lives. However, there really is a permanent record about which we should all be concerned—our credit reports. Here, we’ll take a look at what they are and how credit reports are created.
Credit Reporting Bureaus
There are three primary credit reporting bureaus in the United States; Experian, Equifax and TransUnion. These companies aggregate data relating to our credit usage. Each of these entities receive data from banks, credit card companies, car loan lenders and home loan lenders whenever we apply for credit or use credit accounts we already have.
The information they are provided includes any credit related actions we take such as on-time payments, late payments, account balances and account openings. When we apply for credit, employment, insurance or even apartments, one or more of these organizations are asked to review our credit histories and provide reports. The information they deliver will then help that lender, employer, insurance issuer or landlord decide whether or not to extend offers to us.
Information Contained in Credit Reports
The primary information contained in our credit reports includes our names, addresses, Social Security numbers, dates of birth and employment histories. They will also contain information related to bankruptcies, liens or court judgments filed against us. Work with one of the top-rated debt settlement companies to resolve a debt problem and that history will be recorded as well.
Our credit reports also include a listing of lenders who have accessed our credit reports. These include both “hard inquiries” from loan applications and “soft inquiries” for marketing purposes. Our credit reports also contain records of our credit card usage and the status of our outstanding loans—including when they were opened, our credit limits, current balances and payment status.
Credit Reports vs Credit Scores
The information contained in our credit reports is also used to generate our credit scores. So, while the two go hand in hand, they are not the same thing—per se. Our credit scores are numerical valuations, based upon the data our credit reports contain. Ranging from 300 on the low end to 850 on the high end, lenders use these rankings to determine how likely we are to repay debts based upon our past behaviors with credit. The most commonly employed ranking system was devised by Fair Issac and Company, which is why it is referred to as a “FICO” score.
FICO Credit Scoring Elements
Said in the simplest terms, paying all bills on time, keeping card balances low and avoiding opening lots of new accounts at once keeps our credit scores higher.
Here’s how different activities can affect our scores.
- Payment history 35%: The more we make payments on time the higher our scores.
- Amounts owed 30%: The less of our available credit we use, the higher our scores.
- Length of credit history 15%: Older accounts in good standing raise scores.
- New credit 10%: Opening several new accounts quickly lowers scores.
- Credit mix 10%: Having different types of credit can help raise scores.
Under the FICO scoring system, a good score is generally 670 to 739. Scores from 740 to 799 are considered very good, and those of 800+ are seen as being excellent.
The full breakdown is as follows:
- 300 to 579: poor.
- 580 to 669: fair.
- 670 to 739: good.
- 740 to 799: very good.
- 800 to 850: excellent
Monitoring Your Credit Reports
Because our credit reports play such a significant role in the quality of our lives, the federal government has determined we should be given free access to the data they contain. You can get a free copy of all three of your credit reports (Experian, Equifax and TransUnion) at AnnualCreditReport.com. When you review your credit report, look for the accuracy of entries, unfamiliar accounts and signs of identity theft.
The main sections to check are your personal information, credit accounts, collections, inquiries and public records. You want to make sure all the information your credit reports contain is accurate. Errors on your reports can hurt your credit score and diminish your ability to get approved for loans, employment, insurance and housing. If you find something wrong, dispute it with the credit bureau right away.
In Summary
So yes, there is a permanent record about which we should be concerned. Credit reporting bureaus are recording everything we do pertaining to credit. Handling credit responsibly and keeping an eye on our reports to ensure the information they are accurate will have a definite effect on the quality of our lives.
