An individual’s credit score plays a significant role in determining what financial opportunities are available to them. Your credit report can impact what loans you get approved for, what credit limits you can qualify for, and what apartments you can rent. The importance of keeping your credit in good shape cannot be overstated.
Rather than following a strict set of guidelines for good credit, it is wiser to have a deeper understanding of how exactly credit reports and credit scores work so you know how to keep yours in optimal health. When armed with comprehensive knowledge, you will know why credit scores are important, what is included on credit reports, and how often your credit report is updated. With all this information, it becomes easier to determine what specifically is necessary to improve your credit score.
Why Are Credit Reports So Important?
Your credit report dictates how many financial institutions will view you as a potential borrower. Individuals with higher credit scores will receive better pre-approval offers, lower interest rates, and a wider variety of options for new credit. Credit scores are so important because they greatly impact your overall financial health.
It is not only lenders and credit card companies that rely on your credit report to determine if they want to work with you but also landlords, insurance companies, and even potential employers. Your creditworthiness represented by your credit report is meant to show how financially responsible you are, so it is vital that you take good care of it.
Information Included on Your Credit Report
Consumer credit reports are compiled by the three major credit bureaus – Experian, Equifax, and TransUnion. There are slight differences you might find between the three credit reports but they all include roughly the same information.
Your credit card issuer or lender will regularly report and update information about the credit accounts you have open to the credit bureaus. Additionally, the credit bureaus will attain details relevant to your identity as well as public records relevant to your creditworthiness.
The information is generally divided into these categories within your credit report:
The credit bureaus collect identifying details from your previous credit applications to connect you to your credit report easily. Information is likely to include your full name, date of birth, previous and current addresses, Social Security number, phone numbers, and employment information. These personal details are not factored into the calculation of your credit score as they are merely meant to serve the purpose of identification.
The majority of your report will be made up of the credit accounts you have in your name. Creditors report all important information about the accounts, both past and present, to the credit bureaus, including the account type (i.e., credit card, auto loan, mortgage, poor credit monthly installment loans, etc.), the date the account was opened, the loan amount or credit limit, the account balance, and the payment history.
When you close a credit account, it will remain on your credit report for up to ten years but will fall off your report after the right amount of time has passed. You may find that some information is on one of your reports and not on another. This is likely just a result of some creditors who have reported information to one of the consumer reporting agencies and not the other which is why it is a good idea to check all three of your credit reports.
Whenever a copy of your credit report is pulled, the credit check will appear in the credit inquiries section of your file. Soft inquiries are credit checks that will not impact your credit risk in the calculation of your score, such as companies looking at your credit for pre-approval offers or checking your own report information.
However, a hard inquiry is a result of filling out an application for a new loan or credit card which authorizes that lender to pull your report. Hard inquiries can impact your credit score as too many of them within a short period of time can bring your score down. Hard inquiries remain on your report for up to two years.
Information that is relevant to your credit risk is pulled from public records in state and county courts. These public records could include bankruptcy filings, foreclosures, and/or repossessions.
If your debt is left unpaid for a significant period of time, the creditor may sell your debt to a collection agency which will open a collection account under your name. All collection accounts will be noted on your credit report as negative information that will bring down the overall calculation of your credit score.
While utility and rent bills are not generally reported to credit bureaus, if they are sent to collections, then they will appear in this section of your credit report. Collection accounts can remain on your credit report for up to seven years.
How Your Credit Score Is Calculated
When discussing the updates to your credit report, it is important to also touch upon how credit scores get calculated. Since the credit scoring models FICO score and VantageScore utilize the information on your credit reports to calculate the three-digit number, you can usually expect a credit scores update after the credit reports update.
While there are several different credit scoring models available, they all use a relatively similar formula to calculate your score looking something like this:
Payment History – 35%
Your payment history accounts for the largest percentage of your credit score. A history of timely payments on all your credit accounts will contribute to good credit. On the other hand, too many late or missing payments will lead to a poor credit score.
Amounts Owed – 30%
The total amounts you owe on all your accounts makes up for 30% of your credit score. A significant aspect of this part of the formula is your credit utilization rate which compares how much money you owe versus how much available credit you have. Financial experts advise a low credit utilization ratio for optimal credit health.
Length of Credit History – 15%
The length of your credit history ensures those with well-established credit will see that reflected in their credit score. This metric includes the average age of all your credit accounts, the age of your oldest and newest accounts.
New Credit – 10%
As mentioned earlier, soft inquiries will not harm your credit but hard credit inquiries will be factored into your credit score alongside the opening of any new accounts. Too many hard inquiries or new accounts open in a short amount of time could bring down your score.
Credit Mix – 10%
Your credit usage is meant to be diverse, so your credit mix represents how much variety you have when it comes to account types. It is not a good idea to have only credit cards or only installment loans. It’s better to have a healthy mix of both.
How Often Are Credit Scores and Reports Updated?
Most often, a creditor reports to credit bureaus monthly but they may report data at differing times throughout the month. In addition, certain creditors may only report data to one or two bureaus instead of all three. All the new information will be added to your credit report by the credit bureaus directly after it is reported to them. Therefore, there isn’t a particular time of the month when your report will be updated, but you can expect it to be updated monthly if there is new information that was reported.
Since your credit scores change according to new information on your credit report, you will likely see your credit score update directly after you see a change in your report. In many circumstances, a credit score can be calculated on demand so you can see the new results to the updates on your credit report whenever you wish.
How To Check Your Credit Reports
It is crucial to your overall financial health to check your credit report often, particularly if you are hoping to improve your credit over time. Checking your credit reports regularly will allow you to catch inaccurate information that could result from identity theft or a reporting error. Catching suspicious credit activity quickly and disputing it with the credit bureaus can prevent those errors from majorly impacting your credit score while you are applying for financial products.
Normally, consumers could obtain a free credit report from each bureau once a year. However, with the ongoing COVID-19 pandemic, consumers are allowed free weekly access to their credit reports from all three bureaus until the end of 2023. The process to check your credit report could not be simpler with online access available at AnnualCreditReport.com.
Simple Tips for Improving Your Credit Score
If you aren’t too satisfied with your credit report after the latest update, there are many ways to improve your credit score, so it is more impressive to potential creditors. The key to building credit is to be consistent in your efforts and be patient as you wait for results. You likely won’t see your credit score jump one hundred points overnight but if you keep up with responsible credit habits, you will see the fruits of your labor in time.
Here are some tips and strategies for improving your credit score to have further access to a wider array of excellent financial opportunities:
Make Your Payments on Time
As your payment history is the most significant factor in determining your credit score, on-time payments on your credit card bills and loan installments is crucial to a good credit score. Avoid any late payments on any of your open credit accounts. If you are someone who is prone to forgetting your payments, set up automatic payments on your credit cards so that you will always handle them by the due date. This way you can set up the autopay and not have to think about it every month.
Get Credit for Bills You Already Pay
As mentioned above, utility and rent payments are not reported to the credit bureaus unless they are sent to a collection agency. However, there are new services that allow you to get credit for the on-time payments you make for rent, utilities, and your telephone bill. Adding these items to your credit report could help build your payment history so your credit score rises slowly as you keep making payments each month.
Reduce Your Credit Utilization Rate
If you have too much credit card debt, a high credit utilization rate could be dragging your credit score down. Financial experts recommend a credit utilization rate of 30% or below. You can reduce your percentage by paying off your credit card balances so there is a significant amount more available credit on each of your cards. Doing this will likely make a major difference in your credit score.
Take a Break From Applying for New Credit
To boost your credit, it is a good idea to take a break from applying for any new credit cards or other lending products. Giving your credit report a break from any new hard inquiries might be necessary for all your efforts to pay off. Too many applications for new credit or the opening of too many new accounts at once gives lenders the impression that you are desperate for credit which damages your score. Take a break from applying for credit and allow your on-time payments and reduced debt make the differences you wish to see.