How to Read a Consumer Credit Report

How to Read a Consumer Credit Report

A good credit rating can impact your finances in more ways than one, so it’s vital that you know how to read your consumer credit report. When attempting to qualify for loans, credit cards or lines of credit, lenders take your credit score into account. Your score determines in part whether you’re approved for new credit and what interest rate you’ll receive on money that you borrow.

Credit scores don’t just appear out of thin air. They’re calculated using the information in your credit report. The FICO score, originally developed by the Fair Isaac Corporation, is the most popular and is used in 90% of lending decisions. This score ranges from 300 to 850, with 850 considered to be the “perfect” score.

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The VantageScore is another credit-scoring model that’s gaining ground on FICO. More than 8.6 billion of these scores – which now feature the same numeric range as the FICO score – were used by more than 2,700 lenders from July 2016 to June 2017. Financial institutions represented the largest category of users by far, almost 74% of all VantageScore credit scores. Ten of the 10 largest banks and 29 of the 100 largest credit unions used VantageScore credit scores in one or more lines of business. In 2017 the average FICO score was 695, while the average VantageScore was 675. 

While the FICO and VantageScore models use different algorithms to generate credit scores, they both rely on credit reporting agencies for information. Understanding how to read your credit report is the first step to better credit health.

How to Read Your Consumer Credit Report

At first glance a credit report can seem like a jumble of numbers, but once you know what you’re looking at it becomes easier to decipher. Generally, credit reports are broken down into five main sections.

  • Personal Information – Your credit history is linked to your Social Security number. This, along with your name, date of birth and current address will be listed on your credit report. Previous addresses, your employment history and any other names you’ve gone by in the past, such as a maiden name, would also be included.
  • Credit Accounts – This is likely to be the largest section of your credit report, depending on how long you’ve been using credit. Here you’ll find details for all your current and past credit accounts, including the type of account, the creditor’s name, the current balance, your total credit limit, your payment history and the date the account was opened and closed.
  • Collection Items – When a debt goes unpaid, your creditor can turn it over to a collection agency. Once an account goes to collections, it can show up on your credit report. Collection items can be very damaging to your score.
  • Public Records – If a debt collector sues you for an unpaid debt and wins, the court will enter a judgment against you. Judgments can appear on your credit report, as can any related actions to collect what’s owed, such as a wage garnishment or lien against your property. Foreclosures and bankruptcies would also be included in the public records section.
  • Inquiries – When you apply for new credit, the lender may check your credit report and score. This is called a hard inquiry. Each new inquiry for credit will land on your credit report. The exception to the rule is inquiries that don’t involve a check of your credit report, including any time you check your own report or score.

Good Credit

Good Credit

What is Good Credit

Good credit is a classification for an individual’s credit history, indicating that the borrower has a relatively high credit score and is a safe credit risk.

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BREAKING DOWN Good Credit

Good credit is determined by a borrower’s credit score. Credit scores are provided through credit reporting agencies. Lenders check credit scores for the purpose of providing credit underwriting decisions and background check details.

Credit Quality Classifications

Credit rating agencies assign a score to an individual based on their credit history which is tracked by agencies in a credit report. Credit scoring can vary according to the methodologies used in calculating the credit score. The most commonly used credit score is the FICO Score.

A borrower’s credit score can range from 300 to 850. Lenders will identify credit score classifications by various categories. Typically credit scoring classifications can be broken into five tiers. These tiers include exceptional, very good, good, fair and poor. Borrowers with a good credit score could be in any one of the top three categories. According to a breakdown from Experian, exceptional credit borrowers will have a score ranging from 800 and higher, very good borrowers will have a score ranging from 740 to 799 and a good borrower will have a score ranging from 670 to 739. Therefore, borrowers with a credit score of approximately 670 or higher are considered good credit score borrowers and have the best chance of receiving credit approval from a lender.

The last two tiers include fair and poor. These two categories refer to subprime borrowers. Fair borrowers will have a credit score of 580 to 669 and poor encompasses borrowers with a credit score of 579 or less.

Borrower Considerations

There are a number of factors that influence a borrower’s credit score. If a borrower is in the lower tiers and seeks to improve their credit score so that they fall in the good credit classification there are a few important things they can consider. Credit scores are substantially based on a borrower’s payment history. Any delinquent payments will affect a borrower’s credit score and remain on a credit report for seven years. Thus, making payments on time with no further delinquencies can help a borrower to see monthly credit score improvements.

One factor that can help to quickly improve a borrower’s credit score is the amount owed overall. Total utilization accounts for approximately 30% of a borrower’s credit score. Therefore, if a borrower can significantly pay down outstanding debt balances then that can rapidly improve their credit score month over month.

Other factors involved in the credit scoring methodology include length of credit history, types of credit used, new credit and credit inquiries. Borrowers seeking to improve their credit score should be cautious about the new credit they take on and the number of credit accounts they apply for. A high number of hard inquiries in a short amount of time can negatively affect a borrower’s credit score and increase their perceived risk of default to lenders.

Bad Credit

Bad Credit

What Is Bad Credit?

Bad credit refers to a person’s poor history of paying their bills on time and the likelihood that they will fail to make timely payments in the future. It is often reflected in a low credit score. Companies can also have bad credit based on their payment history and current financial situation. A person (or company) with bad credit will find it difficult to borrow money, especially at competitive interest rates, because they are considered riskier than other borrowers.

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KEY TAKEAWAYS

  • A person is considered to have bad credit if they have a history of not paying their bills on time or owe too much money.
  • Bad credit is often reflected as a low credit score, typically under 580 on a scale of 300 to 850.
  • People with bad credit will find it harder to get a loan or obtain a credit card.

Understanding Bad Credit

Most Americans who have ever borrowed money or signed up for a credit card will have a credit file at one or more of the three major credit bureaus, Equifax, Experian, and TransUnion. The information in those files, including how much money they owe and whether they pay their bills on time, is used to compute their credit score, a number that’s intended as a guide to their creditworthiness. The most common credit score in the United States is the FICO score, named for the Fair Isaac Corporation, which devised it.

A FICO score is made up of five major elements:

  1. 35%—payment history. This is given the greatest weight. It simply indicates whether the person whose FICO score it is paid their bills on time. Missing by just a few days can count, although the more delinquent the payment, the worse it is considered.
  2. 30%—total amount an individual owes. This includes mortgages, credit card balances, car loans, any bills in collections, court judgments, and other debts. What’s especially important here is the person’s credit utilization ratio, which compares how much money they have available to borrow (such as the total limits on their credit cards) to how much they owe at any given time. Having a high credit utilization ratio (say, above 20% or 30%) can be viewed as a danger signal and result in a lower credit score.
  3. 15%—length of a person’s credit history.
  4. 10%—mix of credit types. This can include mortgages, car loans, and credit cards.
  5. 10%—new credit. This includes what someone has recently taken on or applied for.

Examples of Bad Credit

FICO scores range from 300 to 850, and traditionally, borrowers with scores of 579 or lower are considered to have bad credit. According to Experian, about 62% of borrowers with scores at or below 579 are likely to become seriously delinquent on their loans in the future.

Scores between 580 and 669 are labeled as fair. These borrowers are substantially less likely to become seriously delinquent on loans, making them much less risky to lend to than those with bad credit scores. However, even borrowers within this range may face higher interest rates or have trouble securing loans, compared with borrowers who are closer to that top 850 mark.

Credit Score

Credit Score

What Is A Credit Score?

The credit score model was created by the Fair Isaac Corporation, also known as FICO, and it is used by financial institutions. While there are other credit-scoring systems, the FICO score is by far the most commonly used. 

Consumers can possess high scores by maintaining a long history of paying their bills on time and keeping their debt low. 

A credit score plays a key role in a lender’s decision to offer credit. People with credit scores below 640, for example, are generally considered to be subprime borrowers. Lending institutions often charge interest on subprime mortgages at a rate higher than a conventional mortgage in order to compensate themselves for carrying more risk. They may also require a shorter repayment term or a co-signer for borrowers with a low credit score. Conversely, a credit score of 700 or above is generally considered good and may result in a borrower receiving a lower interest rate, which results in them paying less money in interest over the life of the loan. 

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A person’s credit score may also determine the size of an initial deposit required to obtain a smartphone, cable service or utilities, or to rent an apartment. And lenders frequently review borrowers’ scores, especially when deciding whether to change an interest rate or credit limit on a credit card. 

While every creditor defines its own ranges for credit scores (for instance, many lenders think anything over 800 is excellent), here is 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

Credit Score Factors

There are three major credit reporting agencies in the United States (Experian, Transunion and Equifax) which report, update and store consumers’ credit histories. While there can be differences in the information collected by the three credit bureaus, there are five main factors evaluated when calculating a credit score:

  1. Payment history
  2. Total amount owed
  3. Length of credit history
  4. Types of credit
  5. New credit 

Payment history counts for 35% of a credit score and shows whether a person pays his obligations on time. Total amount owed counts for 30% and takes into account the percentage of credit available to a person that is currently being used, which is known as credit utilization. 

Length of credit history counts for 15%, with longer credit histories being considered less risky, as there is more data to determine payment history.

Types of credit used counts for 10% of a credit score and shows if a person has a mix of installment credit, such as car loans or mortgage loans, and revolving credit, such as credit cards. New credit also counts for 10%, and it factors in how many new accounts a person has, how many new accounts they have applied for recently, which result in credit inquiries, and when the most recent account was opened.

Subprime Credit Card

Subprime Credit Card

DEFINITION of Subprime Credit Card

A subprime credit card is a type of credit card issued to people with substandard credit scores or limited credit histories. These cards will typically carry much higher interest rates than credit cards granted to prime borrowers; they also come with extra fees and lower credit limits.

Subprime credit cards are issued by both major issuers and smaller financial institutions that focus only on subprime lending.

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BREAKING DOWN Subprime Credit Card

The subprime credit card industry has seen some controversy as accusations of predatory lending practices have been documented. Predatory lending can lead to a borrower not knowing the full extent of the fees they are paying; some subprime cards carry covenants that can cause the interest rate to spike if a payment is late or the card holder exceeds his or her limit.

Interest rates on subprime credit cards can run as high as 30% and should be used with great caution by individuals seeking a source of credit.

How Terms of Subprime Credit Cards Are Structured

Obtaining a subprime credit card can require a security deposit to be paid by the borrower. The deposit serves as collateral against the charges the cardholder would make. This type of card is also referred to as a secured credit card. The credit limit on the card might match the deposit amount, thus limiting the cardholder to spending within the range of what they could actually pay for, interest aside.

The terms of a subprime credit card that is secured by deposit might allow for credit increases, without depositing more money, if the cardholder pays their bills in full on time for several consecutive months.

Unsecured cards might do not require a deposit; however, they may come with annual fees. Annual fees could also counted against the balance of the card, which means the available credit would be reduced by the amount of that fee.

Some subprime credit cards will take applications from borrowers who have previously filed for bankruptcy protection.

A strategy typically employed with subprime credit cards is to pay off the entire principal balance each month in order to clear debt as well as to demonstrate creditworthiness. This is also a way for the cardholders to avoid paying the high interest rates that are typically associated with subprime credit cards.

The use of subprime credit cards can be a way for borrowers to reestablish or build up their credit history. How the limited credit made available to them is used over time can create a track record that would improve their overall credit report and score, with the caveat that they may face higher charges and penalties if they do not make their payments on time.

Credit Card Debt

Credit Card Debt

What is Credit Card Debt

Credit card debt is a type of unsecured liability which is incurred through revolving credit card loans. Borrowers can accumulate credit card debt by opening numerous credit card accounts with varying terms and credit limits. All of a borrower’s credit card accounts will be reported and tracked by credit bureaus. The majority of outstanding debt on a borrower’s credit report is typically credit card debt since these accounts are revolving and remain open indefinitely.

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Breaking Down Credit Card Debt

Credit card debt can be useful for borrowers seeking to make purchases which allow for deferred payment over time. This type of debt does carry some of the industry’s highest interest rates. However, credit card borrowers do have the option to pay off their balances each month to save on interest over the long term.

Credit Card Debt Benefits

Credit cards are one of the most popular forms of revolving credit and as such offer numerous benefits for borrowers. Credit cards are issued with revolving credit limits that borrowers can utilize as needed. Payments are typically much lower than a standard non-revolving loan. Users also have the option to pay off balances to avoid high-interest costs. Additionally, most credit cards come with reward incentives such as cash back or points that can be used toward future purchases or even to pay down outstanding balances.

Credit Bureau Reporting and Analysis

Generally, credit card debt refers to the accumulated outstanding balances that many borrowers carry over from month to month. Lenders report credit card debt level balances to credit bureaus each month along with a borrower’s relevant credit activity. Thus, credit cards can be an excellent way for borrowers to build out a favorable credit profile over time. However, negative activity such as delinquent payments, high balances, and a high number of hard inquiries in a short period of time can also lead to problems for credit card borrowers.

Credit card debt is highly influential in determining a borrower’s credit score since it will typically account for a significant portion of credit utilization on a borrower’s credit profile. Credit bureaus track each individual credit account by itemized trade lines on a credit report. The aggregation of outstanding credit card debt from these trade lines sums to a borrower’s total credit card debt which is used by credit bureaus to calculate credit utilization, an essential component of a borrower’s credit score.

Things you should know about annual credit reports

THINGS YOU SHOULD KNOW ABOUT ANNUAL CREDIT REPORTS

Your personal credit report is a very important tool in your life. This report is used by our employer, insurance agents, banks and companies that assesses our credit applications. Therefore, you must be certain that the information in your credit report is accurate and precise. This can be done by being aware of your credit activities and by careful monitoring. It is recommended by the United States Federal Commission to check your credit report annually. In fact, it has ensured a number of laws which you can make use of, so you can get your credit report for free. Yes! you are entitled to a free credit card report. To name a few, these 3 bureau credit report agencies: Equifax, Experian, and TransUnion, offers free services so that your credit report needs and processes will go smoothly. They also give ideas and suggestions on how to make the best use of these services.

A consumer can course through a request report from all these agencies at the same time or in a staggering manner throughout the 12 month period. It is a way to see your free credit reports from all 3 bureaus. You are not required to provide a credit card number to avail of this service. You only have to establish an account. But you must also be mindful because there are many of fraudulent websites on the internet assuring to give you free annual credit report. They usually ask for your credit card information and then convince you to register in a trial membership. Once you are enrolled and you don’t cancel the trial, you will end up paying for a full period of the credit monitoring service. So be very cautious and careful in choosing the websites you wish to enroll to. Do a little research about the sites that are legitimate. Remember that the true websites does not require you to enroll in any trial subscription. You can order your annual credit report and receive it at that same day.

 

Universal Default

Universal Default

What is Universal Default

Universal default is practice whereby a credit card issuer increases a credit cardholder’s interest rate if the individual is late making a minimum payment on any debt that is reported to the credit bureaus. For example, if Jenny has a Visa card and a Discover card and she misses the payment deadline on her Discover card, her Visa card issuer might increase the interest rate on her Visa card. Her Visa card issuer might even increase her rate if it learns Jenny was late paying her car loan.

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BREAKING DOWN Universal Default

Universal default practices were made less severe by the Credit Card Accountability, Responsibility and Disclosure Act of 2009 (Credit CARD Act), a law designed to protect credit card users from abusive lending practices by card issuers. Its primary goals were the reduction of unexpected fees and improvements in the disclosure of costs and penalties. The CARD Act changed many of the rules that credit card companies must follow. One of those rules restricted the balance amounts on which card issuers can increase a consumer’s interest rate. Because of the legislation, issuers can’t increase the rate on your existing credit card balance unless you are 60 days delinquent on that account. However, the CARD Act did not eliminate universal default or make it illegal, and issuers can decide to increase your interest rate on future charges.

To understand when the interest rate on your credit card can go up, by how much and for how long, read the card’s terms and conditions. Specifically, read the section on the penalty rate, also called the default annual percentage rate (APR). This section of your credit card conditions will describe the interest rate that may go into effect if you pay late. For example, a card might have a penalty APR of 29.99 percent variable, based on the prime rate, that goes into effect if you make a late payment or if your payment is returned unpaid. The penalty rate may apply indefinitely.

Keep a check on your 3 Credit Scores for a strong financial health

Keep a check on your 3 Credit Scores for a strong financial health

Financial uncertainties can have an adverse effect on the life of an individual. It is therefore extremely important to have enough options of alternative finances that can support the individual in these troubled times. One of the major troubles that the individual in a financial crisis can face is the quality of his/her credit score. Any financial help by the credit agencies can be obtained by having a high quality score of credit. It is therefore very essential to keep a check on the scores to have a strong financial health. The records of credit transactions of each and every citizen are maintained by the three governments recognised credit agencies namely the Equifax, Experian and Transunion. The 3 Credit Scores offered by these agencies determine the ability of the individual to get any financial help of credit during the necessities.

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The scored of credit maintained and recorded by these independent and unique agencies help the insurance companies, lenders, creditors and employers in assessing the financial health and past payment history of the individual. If an individual has a poor credit score, getting a job, loan/financial help, health and general insurance can be extremely difficult. It is very essential to keep a track of the credit history and ensure having a high score. The score of credit can get adversely impacted on account of late payments, consolidations of accounts, missed payments, charge offs and identity fraud. The free govt credit report can be easily manipulated leading to bad scores with simple information’s of identity like the social security number, address etc. It is therefore becomes extremely important to keep a track of the entries done in the report as maintained, marketed and sold by the recognized credit bureaus.

Each and every citizen can get access to the free annual copy of the credit report provided by the three agencies to maintain and monitor the entries. This will allow the individual to cross verify the entries to identify the misappropriations if any to report the same to the agencies. By correcting the inappropriate entries, one can improve the credit score leading to enhanced strength in accessing credit. One can avoid wrong entries in the report, identify theft, misreporting by creditors and other mistakes that affect the score. With the facility of requesting the annual report through an online platform, the process of monitoring the score has become extremely easy and effective. One can get the annual report for free through the AnnualCreditReports.com website. The 3 Credit Scores maintained by the entire three top and recognized credit agencies are pulled out, analyzed and consolidated for easy referral by the citizens.

There are many benefits of knowing and improving the 3 credit scores such as detection of frauds and misappropriations, improving the chances to get access to easy loans, enhanced credit limits and reduced credit card charges, low premium insurance etc., It is very important to understand and implement the different solutions of improving the 3 credit scores. Some of the easy methods are the timely payment of dues, bills and installments, use secured credit cards, keeping low balances in the revolving accounts and credit cards etc., By keeping a close watch on the credit reports issued by the agencies can help the individual in staying top of finances and avoid difficult financial situations.

The Basics in Free Credit Report

The Basics in Free Credit Report

A credit report is a basically a record containing all of your credit activities and detailed information about your credit history. These includes information on credit accounts, loans, payments that are due, and new inquiries that you’ve made. Every time you make an application for a credit card or other additional loans you wish to procure, it records as a query on your credit report. Therefore, it is a record of how you basically use your credit and how much of is still available for your perusal.

Credit reports can be obtained by lenders or card companies. They are the ones who are evaluating loan requests, as well as considering whether to approve your credit card application or not.

A credit report shows all your personal and financial information. This includes your name, your home address, your employment, your credit and loan which you’ve made in the past, inquiries, and public records, which are your tax liens and bankruptcy filings. In fact, all of your 3 credit reports bad information which date back 7 years ago, along with your other account details are identified. Sadly, a number of people mismanage their credit in the past and consequently pay the price of not getting additional credit because of this information.

Because of this, a lot of people nowadays are becoming consciously aware of their credit report and its effects in their daily lives. Whenever applications for a home loan, car loan, or any line of credit, credit scores seems to have an enormous disparity in the total interest a consumer will be paying. In effect, they become meticulous and concerned to the total amount of mortification they will disburse.

The Basics in Free Credit Report

Therefore, managing your credit report is a vital key to avoid discrepancies and inaccurate information form your credit report. You can either consult somebody from the credit bureau or submit a report to them. An average of 30 days will be allotted for the bureau to investigate your report. Or you can also enroll for a free credit report through a legitimate website online.