When you’re ready to apply for a new line of credit or a loan, then you need to know how likely the chances are you’ll be approved. Luckily, there’s a standardized way for determining your eligibility known as a “credit report” that includes your credit score. But how do credit reports work, and what are the credit score ranges that are the best to have? Here’s everything you need to know about your credit report and how it differs from your credit score.
What is a credit report?
Your credit report is the history of your relationship with creditors of all types. Student loans, car loans, mortgages, debt consolidation, and credit cards are all included in and affected by your credit report. Your report is typically broken up into five or six major categories:
Payment History
Your payment history shows the number of on-time payments you’ve made plus any late payments within the past 3-5 years. Most lenders will look the other way if you miss a deadline here and there but will report negative activity if there’s a pattern of missed deadlines or your payments are more than 30 days late.
Credit Utilization Rate
Your Credit Utilization is the amount of credit used every month over the total available credit you have. For example, let’s say you have three credit cards, and each card has its own credit line:
Credit card A: $5,000 line
Credit card B: $7,500 line
Credit card C: $10,500 line
With these three cards, your total available credit would be $23,000. If you carry a balance on any of these cards, your available credit decreases, and your Utilization Rate changes. Typically, experts recommend having a utilization rate of 20% or lower, though the highest scores keep their rate under 10%.
Total Balances and Debt
Total Balances and Debt is very similar to Credit Utilization except that it considers outstanding loans.
Age of Credit
Creditors want to see that you can keep a good, long-standing relationship with them, so they’ll look at your average age for all open credit lines. The easiest way to get a high score in this category is by keeping your oldest credit cards open so that your average age skews higher. Creditors typically look for an average age of 5 years or more.
New Credit Applications
Also known as “hard pulls,” new credit applications are added when you apply for a new loan or line of credit. The more hard pulls on your credit report, the less likely you are to be approved for new credit since it will look like you’re desperate for more credit to potential lenders, even if this isn’t the case. Hard pulls will fall off your credit report, usually after three years since your application.
Mix of Credit
The best credit scores are reserved for those who can maintain good standing with all types of borrowed money, though don’t worry too much if you only have credit cards and no loans as this factor isn’t weighed too heavily.
What is a credit score?
Your credit score is the sum total of all parts of your credit report. There are currently two scores available for the three major credit bureaus (Experian, TransUnion, and Equifax) to use, and both types will score credit in a range of 300 – 850, with 850 being the best.
FICO© Score
The FICO© score was created by the Fair Isaac Corporation in 1989 and was the only method of scoring credit until the VantageScore was released in 2006. Your FICO© score is based on the tallied results for five different factors, with each factor accounting for a different percentage of your score:
- Payment History: 35%
- Credit Utilization: 30%
- Age of Credit: 15%
- New Credit Applications: 10%
- Mix of Credit: 10%
VantageScore©
VantageScore© was released in 2006 to be a more predictive model than the FICO score and was meant to make credit scoring easier to understand. VantageScores are determined by six factors instead of FICO©s five and do not have a set percentage but instead use levels of “influence” to determine your score:
- Payment History: Extremely Influential
- Age and Type of Credit: Highly Influential
- Credit Utilization: Highly Influential
- Total Balances and Debt: Moderately Influential
- New Credit Applications: Less Influential
- Available Credit: Less Influential
The bottom line
Your credit report and credit score go hand-in-hand when it comes to determining your eligibility for new loans or credit cards. The more you take time to understand how they work, the better chances you’ll have to improve your score quickly.