Your credit report holds significant sway over your financial opportunities. Whether you’re applying for a mortgage, a car loan, a credit card, or some other form of borrowing money, lenders use your credit report to assess your creditworthiness. But what exactly is on it?
Knowing what appears on your credit report and understanding how that information influences a lender’s decision – with the help of a certified, nonprofit credit counselor if you need it – can empower you to take control of your financial future.
In this article, we’ll clear up some of the mystery as we explore the various components of a credit report and explain their impact on lending decisions.
First, what is a credit report?
If you didn’t know, a credit report is a detailed record of your credit history compiled by credit bureaus, which include Equifax, Experian, and TransUnion. Your personal report contains information about your borrowing and repayment activities, providing a comprehensive view of how you manage the responsibility of those activities. Lenders of all types, from banks to mortgage brokers, use this report to evaluate the risk of lending to you.
What are the key components of a credit report?
1. Your personal information.
Your credit report begins with the basics: your name, address, Social Security number, date of birth, and also your employment history if you provided information about where you work to a creditor. This section identifies you and ensures the accuracy of your credit file. While this information doesn’t directly impact your credit score, any inaccuracies can lead to potential issues, such as identity theft or confusion with someone else’s credit file.
2. Your credit accounts and trade lines.
This section lists all your credit accounts – both past and present, open and closed – including credit cards, mortgages, auto loans, student loans, and other types of credit. For each account, the report details:
- Creditor’s name. The lender or institution that extended credit to you.
- Account type. The specific kind of credit (revolving credit, installment loan, etc.).
- Account number. The unique identifier for the account.
- Date opened. When the account was established.
- Credit limit or loan amount: The maximum amount of credit available or the original loan amount.
- Balance: The current amount owed on the account.
- Payment history: A record of your payments indicating if they were on time or late.
What impact do your credit accounts have on lending decisions?
Lenders scrutinize your credit accounts to understand your borrowing behavior. They look for a mix of credit types, a long credit history, low balances relative to credit limits, and a consistent record of on-time payments. Positive marks in these areas suggest responsible credit management and a greater likelihood of loan approval, while missed or late payments, high balances, and frequent opening of new accounts can signal excessive potential risk.
Public records can significantly impact your creditworthiness and remain on your credit report for several years.
3. Your credit inquiries.
When you apply for new credit, the lender will make a credit inquiry to check your credit report. There are two types of inquiries:
- Hard inquiries. These occur when a lender checks your credit report as part of the approval process for a loan or credit card. Hard inquiries can slightly lower your credit score and remain on your report for two years.
- Soft inquiries. These occur when you check your own credit, when a lender checks your credit for pre-approval offers, or when an employer conducts a background check. Soft inquiries do not affect your credit score.
What impact do credit inquiries have on lending decisions?
Lenders view multiple hard inquiries within a short period of time as a potential sign of irresponsibility, financial distress, or other indications of high risk. However, several inquiries related to mortgage or auto loan applications within a brief timeframe are typically treated as a single inquiry for scoring purposes, as it’s assumed you’re rate-shopping or otherwise being smart about your borrowing.
4. Your public records.
This section includes information on bankruptcies, foreclosures, tax liens, civil judgments, and other legal actions related to your financial status. Public records can significantly impact your creditworthiness and remain on your credit report for several years. Bankruptcies, for example, can stay for up to 10 years.
What impact do public records have on lending decisions?
Public records are red flags for lenders. They indicate severe financial distress and a higher likelihood of defaulting on new credit obligations. A history of bankruptcies or foreclosures can drastically reduce your chances of securing new credit, of not make them impossible, and result in higher interest rates if you are approved.
5. Your collections.
If you fail to pay a debt, the creditor may turn the account over to a collection agency. The collections section of your credit report lists these accounts, including the original creditor, the amount owed, and the date the account was placed in collections.
What impact do collections have on lending decisions?
Accounts in collections are major negatives on your credit report. They signal to lenders that you have struggled to manage your debts and have defaulted on repayment. This can make it challenging to obtain new credit and can result in considerable less favorable loan terms if you are able to secure an approval.
6. Your credit score.
While not a part of the credit report itself, your credit score is a critical factor derived from the information in your report. It is a numerical representation of your creditworthiness, typically ranging from 300 to 850. The score is calculated based on several factors, including payment history, credit utilization, length of credit history, types of credit, and recent inquiries.
What impact does your credit score have on lending decisions?
Your credit score is often the first thing lenders look at when evaluating your credit application. A higher score indicates lower risk and can lead to lower interest rates, higher credit limits, and other favorable loan terms. A lower score may result in higher interest rates, stricter terms, or even denial of credit.
Conclusion
Understanding your credit report and the factors that influence lending decisions is crucial for maintaining good financial health. By regularly reviewing your credit report, you can identify areas for improvement, dispute inaccuracies, and take proactive steps to enhance your creditworthiness.
If your credit is in-not-so-great shape and you’re thinking of DIYing your credit score fixes, or working with a scammy for-profit credit repair organization, think again. At CredEvolv, our platform has been proven to make you 10 times more likely to qualify for a loan within 12 months after being initially denied financing due to credit, versus those who try to go it alone. Our proven, customized methods are ethical and transparent, so enroll today!
Remember, responsible credit management, such as making timely payments and keeping balances low, is the key to building a strong credit profile that will open doors to better financial opportunities. And if you need help in that area, we’re here for you!