How to Read a Credit Score Report?

Introduction

Your personal credit score report contains all of the significant information you and others need to know about your financial actions and status. Credit reports take a close look at your existing credit and loan accounts and the way in which you pay them. In today’s society in the United States, an official credit report is often required to obtain a new job, rent an apartment or house, buy a car, and for many other things. Because credit reports have become such an integral part of so many aspects of our lives, it is important that we know how to decipher them. This article focus on reading the credit report from FICO, with the target audience of United States. If you have any thoughts, please post it in the comments section. Subscribe to our future articles here.

What Is FICO?

Nowadays, perhaps the most important factor that determines whether or not we can get credit towards making a large purchase in the U.S. comes in the form of a credit score as reported by the Fair Isaac Corporation (FICO). FICO basically compiles large amounts of data about every potential credit-seeker around the world in order to come up with an individual score that will help other lenders determine as to whether or not they will extend credit to a candidate. FICO has reported that their database is used in about 10 billion credit-related decisions each year.

In other words, by some interesting twist, FICO has established itself as the authoritative source on everyone’s credit score. Because of this, we have to give their credit score respect, and we have to try to understand it if we want to improve our score.

Unfortunately, FICO doesn’t reveal the inner workings of how exactly they determine their scores; instead, they have a general breakdown of the score. Even though it’s general, you should do your best to understand it and focus on these areas if you wish to improve your score. The following sections explains how to read the credit score report from FICO?.

Payment History (35%)

The largest factor that FICO uses to determine your score is the quality of your payment history. Do you pay on time? Do you have outstanding debts? Are you constantly late in making payments?. If you have trouble making payments or you’re past making your payments, then FICO uses that in order to predict your future behavior. The logic goes that if you can’t handle older payments, then you probably won’t be able to make future payments on new debt.

In order to score this category, FICO monitors two kinds of debts: revolving and installment. Revolving debt, like the kind you get by using credit cards, will factor in less than installment debt, such as the kind you get when you take out a mortgage. If you default a mortgage, for example, it could significantly wreck your credit score, while a late credit card payment might be far less significant. The point here is that you should be timely about making your payments.

Debt Amounts (30%)

Next FICO looks at how much outstanding debt you’re currently responsible for. In this case, revolving debt, such as credit card debt, gets much more weight than, say, a car loan. This is because installment debt usually keeps you on a payment plan, whereas credit card debt can be determined by both your payment habits and your spending habits.

FICO considers those people who have high credit card debts to be fairly irresponsible with their money, so they get worse credit scores. If you want to avoid this fate, then you should keep your credit card debt and other revolving debts as low as possible. A healthy debt to spending limit ratio is about 30%. In other words, do not let your debt exceed 30% of your spending limit.

Length of Credit History (15%)

FICO then looks at how long you’ve been in the credit-seeking game. How long have your various accounts been open? How long has it been since the last action on your account? These questions help FICO determine how experienced you are at managing debt. Of course, those new to credit will not have a good credit score because they haven’t had a chance to develop their credit history, so the scoring system isn’t perfect here. That’s partly why FICO weights this factor much less than the others.

If you’re new to credit, start using credit for reasonable purchases and be responsible when it comes to making your payments. This will help you build a good credit history. If you’re a long-term credit user, then you should just make sure to keep up the good payment habits.

New Credit and Credit Mix (20%)

New credit and a mix of credit types, about 10% each, are the final factors that FICO uses to determine your credit score. According to FICO, someone who constantly opens up new credit accounts could be a risk for future lenders. And yet, FICO likes to see that people can manage various types of credit. In other words, it’s good to have a balance of credit accounts and a couple of new accounts as well according to the requirements of their current financial situation. FICOS uses this factor to determine how responsible people are when pursuing new credit.

Amending a Bad Credit Report

Receiving a credit score report that does not put your financial responsibility in a positive light can be a difficult and scary thing. Because credit reports have been built up to signify so much about our financial trustworthiness, remedying a negative report is important. The most important step to take when amending a bad credit report is making sure you understand why the report was negative. If you have a lot of debt in your name, this is the first place you should start. Work to pay off your debt and credit cards bills in a timely manner. Building a strong credit report can take time, but it is something worth doing.

Summary

Your credit score plays a huge role in many different aspects of adult life. If you have loans or credit cards, it is important that you stay informed about your credit score. It is recommended that you check your score regularly to make sure that everything is in order and there are no flaws in the report. However, before you can learn anything from these reports, you have to understand them and know how to read them. Your credit score is based on four primary credit factors: payment history, debt amounts, length of credit history, and new credit and credit mix. Each of these four factors weighs differently within the FICO report. Credit score reports can be purchased online or ordered via snail mail. Just as you go to the dentist for a checkup twice a year, you should also regularly checkup on the health of your credit.

Author Bio:

Nancy Farrell is a freelance writer and blogger. She regularly contributes to the criminal justice schools, which discusses about child abuse, human rights, divorce, and crime related articles. Questions or comments can be sent to: nancy.farrell13@gmail.com.