A credit report is a compilation of an individual’s lending and debt repayment history. Bankruptcies and late payments are included in this report. In the United States, this information is gathered and disseminated by three main credit bureaus: Experian, TransUnion and Equifax. These bureaus will only provide their report upon request by banks or other lending institutions, such as credit card companies, seeking to determine an individual’s credit worthiness. Combined with the individual’s income, this information will influence whether an individual will receive a loan or credit and, if so, the interest rate and repayment length attached to the loan or credit. Each bureau also assigns a credit score to an individual based on a scale of 300-850. The higher the credit score, the more likely an individual will obtain requested financing, most likely on favorable terms.

How is my credit rating determined?

An individual’s credit ranking is based on five main factors: payment history; ratio of debt to credit limit; credit history length; the types of credit; and the number of inquiries made for the purpose of seeking more funds. Payment history refers to the regularity and amount of money an individual has paid for a debt. Payments made according to the credit contract, meaning the amount paid and the time of payment comply with the credit agreement benefit a credit score. The ratio of debt to credit is used by lenders to identify whether an individual is living beyond his means. The higher the amount of debt rather than available and unused credit, the more likely it is that an individual has too much debt and not enough income to pay those debts. Credit history length refers to the amount of time an individual has assumed debt and credit from lending institutions. Typically, lenders appreciate longer credit histories because it indicates that the individual is knowledgeable and responsible with debt repayment. There are many different types of credit and each impacts a credit score differently. Mortgages, credit cards, educational loans and home equity lines of credit are a few types of credit. Mortgages and educational loans are usually considered “good” credit and benefit an individual’s credit score. Finally, a credit rating is also impacted by the number of times that a lending agency inquires into a credit report because the individual is seeking funding. More inquiries indicate that the individual is seeking additional credit, which may increase the ratio of debt to credit.

• About Credit Scores: Explanation of how credit scores are calculated provided by FICO, the company that invented credit scores.
• Credit Report Basics: Site owned and operated by Experian explaining the basics of credit reports.
• Your Credit Score: How Creditors Calculate Your Worthiness: Washington State Attorney General’s explanation of how a credit score is calculated and its impact on your credit worthiness.

How do I acquire and understand my credit report & scores?

Credit reports are made available to individuals by each of the three credit reporting bureaus. Requests can be made in writing or online, but either method will require proof of identification such as a social security number and other private information. These reports cost a nominal fee, and do not usually include a credit score. Credit scores must be purchased separately for an additional fee. Recently, the federal government has made available one free credit report from each of the credit bureaus per year, per individual. This free report does not include credit scores, but a credit score from each of the bureaus can be obtained for a fee.

Each bureau organizes their report differently. Each report contains the individual’s personal information such as current and previous addresses and date of birth. The remainder of the report is dedicated to the individual’s credit, loans and other debt. Information included for each debt is the account name, number and type, balance, if the account is past due, the date the account was opened, the current account status, the amount of monthly payment, if the account is a loan, the payment status, the highest limit of the debt, if the account is a credit card, and the total limit of the account. Account contact information mayo r may not be included.

To understand a credit report and score, review each account and determine whether the information is correct. If an account or its information seems incorrect, contact the bureau for more information. The better an individual’s credit report, the higher will be his or her credit score.

• Annual Credit Report: Government-approved site for annual, free credit report from all three credit bureaus.
• Understanding Your Credit Report: Mapping Your Future is a non-profit organization dedicated to teaching financial basics to the public. This page provides information on understanding a credit report.
• Experian: One of the main credit reporting agencies. Site provides ability to obtain and review credit report online and offers all three bureau’s reports in one order.

What are the consequences of my credit history?

An individual’s credit history impacts their ability to obtain credit and loans, and the terms of those credit and loans. Poor credit history often leads to denials for credit and loan requests or extremely high interest rates on credit and loans offered to the individual. Moreover, a poor credit history can result in an individual being required to obtain a co-signer for a loan. A co-signer assumes legal liability for a loan and guarantees the loan should the debt not be timely paid. Requiring a co-signer indicates that the lender is distrustful of the individual’s ability or willingness to repay a debt. Oftentimes, a debt requiring a co-signer also has a high interest rate. While an individual can improve a bad credit report by reducing debt and making timely payments, the majority of credit history is not removed from a report. Therefore, poor credit may affect an individual for years after repairs are made.

• Smartedge by GMAC: Lending institution providing information about the effects of bad credit.
• Good Credit vs. Bad Credit: Iowa College Access Network’s explanation of good and bad credit and how it can impact obtaining credit and loans.
• Credit Repair: How to Help Yourself: Federal Trade Commission’s information on how to repair bad credit. 

Where can I find more information?

To find more information about how credit reports are calculated, how they can impact credit and debt requests and how to repair a bad credit history, visit the sites below.

• Fair Credit Reporting Act: Full text of the Act, the federal law that governs the collect, dissemination and use of credit information. 
• Federal Trade Commission: General information from the government agency about consumer credit reports.
• Transunion: One of three main credit reporting bureaus. Obtain a credit report and learn how a credit score is calculated.
• Equifax: Another major credit reporting bureau. Obtain a credit report and learn how a credit score is calculated.
• Analyzing Your Credit Score: American Student Assistance, a non-profit organization, report on understanding a credit score.
• Free Credit Report: Another source in addition to AnnualCreditReport.com for obtaining credit reports and scores from the three main bureaus.