In most countries, a credit report, also known as credit history or credit reputation, is a record or documentation of a company’s or a person’s previous borrowing and payments. Such record also contains information regarding bankruptcy and late payments.
When applying for credit from a credit card company, a store or a bank, the customer will be required to fill out an application form and the information that he/she will put in that form will then be forwarded to a credit bureau or a consumer reporting agency, together with his/her credit history, regular updates on the standing of his/her credit accounts, buying history, residence history and whether he/she has been bankrupt or not in the last 10 years. If for instance you have been imprisoned, sued or arrested for financial reasons, then it will be reflected on your credit history.
The information will be used by banks, credit card companies and other lenders to know the credit worthiness of an entity or an individual. This will help the lender and businesses in evaluating your applications for insurance, credit, employment and other purposes authorized by the Fair Credit Reporting Act. Because of this, you need to review your credit report regularly for factual errors and omissions.
Factors in Determining your Credit Rating
Though the ways to determine credit ratings in every country are different, the factors or determinants are the same and may consist of:
o Payment history – Late payments on your usual monthly bills should be avoided because it will definitely lower your credit rating. The credit card debts and bank loans are usually missed because they aren’t as critical as your gas or electricity bills.
o Debt Control – The lenders want to make sure that the borrowers are not taking debt than they can actually handle. As estimated by experts, the borrower’s non-mortgage credit payments every month should not be more than fifteen percent of his/her net income. And one of the means to reduce your monthly expenditures is to get rid of chronic expenses, like car loans. Through this, your debt-reduction plan can have more funds.
o Borrower’s stability and responsibility – the lenders usually see things like the borrower’s longevity in his/her job. They consider this as a sign of your stability.
o Closing Credit Accounts – bear in mind that credit scoring companies usually pay much attention to the duration of your credit history so closing your old credit accounts will lower your credit rating since it deletes your longest payment history. However, closing newer accounts can make your score get better by lessening your available amount of credit.
o Re-aging – this process can significantly enhance your credit report score because through this, your credit history is re-written and you will have a fresh start on that certain account.
o Credit Inquiries – inquiry or notation on your credit report file are of two kinds:
1. Soft Credit Inquiries
a. The credit agency can sell the individual’s or entity’s contact details to a certain advertiser who’s buying a list or persons with the same characteristics, such as homeowner with outstanding credit rating.
b. A creditor can review an individual’s credit every so often.
c. With the permission of the client, the credit counseling agency can also get the client’s credit reputation.
2. Hard Credit Inquiries – this can be done by lenders, with the borrower’s permission, for the sole intention of extending his/her credit. Such inquiries from lenders can affect the customer’s credit rating so it will be better to keep your credit inquiries to a minimum number. There are lenders who will think that many credit inquiries means that he/she is planning to make loans.
These are just among the factors that directly affect your credit report score, particularly if you are applying for a credit card or making a loan. But you should not forget that there’s no quick fix in improving your credit score and maintaining a good rating is quite hard. It takes a little scrimping, discipline and common sense but they will all be worth, when you finally get your card or your loan without much hassle. A credit report is not biased since it will just jot down information but it will not judge whether your action id good or bad.