Understanding your credit report and score

In today's ever changing world of finance it has never been more important to understand your credit report and score. Whether you want to borrow money to purchase a house or a car or simply open a credit card you will need to understand your credit report and score. In addition insurers and even prospective employers are checking the credit reports of prospective applicants so knowing what is in your credit report and what your credit score is can literally put money in your pocket. At first glance understanding what is in your credit report and what your score reflects can be overwhelming but by breaking it down into small sections you can understand your credit and how to manage it.

What are Credit Reporting Agencies?
One of the first steps in understanding what your credit report is to understand where it comes from. Your credit report and score will come from a credit reporting agency. The purpose of credit reporting agencies is to collect an individual's financial information, compile it into a credit report and, for a fee, make it available to the individual and to other authorized parties, including financial institutions. Usually when you apply for a loan you give the lender permission to get a copy of your credit report. In addition companies that lend money rely on credit reporting agencies and the credit reports they generate to help them assess a customer's ability to repay what they borrow. It is important to know that although there are many local and regional credit bureaus throughout the United States, most credit bureaus are either owned or under contract to the nation's three major credit reporting agencies. These are: Equifax, Experian (formerly TRW) and TransUnion.

What is your Credit Report?
A credit report is a detailed history of a consumer's borrowing habits and consists of the following information:

• Identifying information such as your name, past and present addresses, date of birth and employment history.

• Credit accounts submitted by lenders who have extended credit to you. This also includes the type of account (credit card, auto loan, mortgage, etc.), the date the account was opened, the credit limit or loan amount, the account balance and the payment history for each account.
• Inquiries on any account for the last two years including voluntary inquiries, (when you apply for credit or a loan), and involuntary inquiries, (when a lender you may not be aware of orders your report) to see if they want to make you a pre-approved credit offer.
• Public record and collection items including information from state and county courts and collection agencies, and public record information like bankruptcies, foreclosures, lawsuits, wage attachments, liens and judgments. These items will stay on your credit report for predetermined amounts of time.

What is your credit score?
Have you ever wondered why you can go online and be approved for credit within 60 seconds? Or even get pre-qualified for a car without anyone even asking you how much money you make? Or perhaps you have wondered why you get one interest rate on loans, while your neighbor gets another? The answer is-your credit score! Your credit score is a number that is generated by a mathematical algorithm (a formula) based on information that is in your credit report, compared to information on tens of millions of other people. The resulting number is considered a highly accurate prediction of how likely you are to pay your bills. You may think that your credit score is not that important but you would be terribly wrong. If it sounds arcane and unimportant, you couldn't be more wrong. Credit scores are being used extensively, and if you have gotten a mortgage, a car loan, a credit card or auto insurance, the rate you received was directly related to your credit score. The higher the number of your credit score, the better you look to lenders. In addition people with the highest scores get the lowest interest rates.

What are the scoring categories?
Lenders can use one of many different credit-scoring models to help them determine if you are creditworthy. It is important to understand that different models can produce different scores. Typically, lenders use some scoring models more than others. The FICO score is one of the most popular scoring methods. The scale on FICO runs from 300 to 850. Most consumers will have scores between 600 and 800. It is important to realize that a score of 720 or higher will get you the most favorable interest rates on a mortgage. This is according to data from Fair Isaac Corp., a California-based company that developed the first credit score as well as the FICO score.

How your credit score is determined
Your credit score is made up of the following categories and weighted with the listed percentages:

• How you pay your bills-35%
• The amount of money you owe and the amount of available credit you have-30%
• The length of your credit history-15%
• Your mix of credit-10 %
• New credit applications-10%

What's the bottom line?
Those seeking a loan (whether for a mortgage, car or credit card) should understand that no matter which scoring model lenders use, it pays to have a great credit score. Your credit score not only affects whether you get credit or not but also how high your interest rate will be. A better score can lower your interest rate and put money in your pocket. For an example of how much money a better interest can save you go online to interest rate calculator (many are accessible on the web for free) to determine how important your credit score can be in saving you money.

How often does my credit score get looked at?
It is important to understand that if you have rented an apartment, got braces, bought cell phone service, applied for a job that involved handling a lot of money, or needed to get utilities connected, there's a good chance your score was pulled. Also if you have an existing credit card, the issuer is likely to look at your credit score to decide whether to increase your credit line or even charge you a higher interest rate. If you are looking to buy a car most car dealers will want to know your credit score right away so they can put a loan together for you. While you may view your credit score as restrictive having one has opened up lending to a lot more people since there is a standardized way to determine credit worthiness.

Consumers' rights concerning your credit report and score
Until recently, many Americans did not even know that they had a credit score because it was a closely guarded secret in the lending industry. Until the last few years lenders were prohibited from telling borrowers their credit score. Their line of reasoning was that the number was the result of analyzing complex financial data that the layperson would have difficulty understanding. Plus, lenders felt that if people knew their score (according to the industry mindset at the time), they might be able to change their behavior to manipulate the score and throw off the whole model thus rendering it useless.

All that changed just a few years ago, when consumers began finding out about the score and demanding to see it. Public outcry on the possibility of people being denied credit based on bad information in credit reports has led to several pieces of legislation and as a result a much more open attitude about credit scores. Today consumers can buy their score online from any number of sources, but everyone is entitled to a free copy of their credit report every 12 months from each of the three major credit bureaus (Equifax, Experian and TransUnion).

What does not count in a credit score?
It is equally important to understand what is not counted in your credit score as it is to know what directly affects it. While a lender may consider all the following factors when deciding whether or not to approve a loan application they are not part of how a credit score is calculated.  The factors that do not affect your credit score are:

•     Age
•     Race
•     Sex
•     Job or length of employment at your job
•     Income
•     Education
•     Marital status
•     Whether you have been turned down for credit
•     Length of time at your current address
•     Whether you own a home or rent
•     Information not contained in your credit report

Credit scores are not perfect
The major drawback to credit scoring is that it relies on information that is in your credit report, which is quite likely to contain errors. That's why it has become critical that you check your credit reports annually, or at the very least three to six months before planning to buy a house or a car. This should give you sufficient time to correct any errors before a lender pulls your score. Financial experts advise that as consumers know about credit reports and scores they will be able to do more to correct errors and provide more oversight since if consumers can police the accuracy of their own reports, everybody gains.