3.03 Credit Reports

What is a Credit Report?

A credit report is simply a history of your credit. A credit report contains:

• All credit card accounts
• All loans
• Current balances
• Credit limits
• Late payment history
• Any bankruptcies in the last 10 years (some credit agencies remove these after 7 years)
• Unpaid taxes
• Anytime someone has checked your credit in the last 2 years
• Public records and collections

Credit Reporting Agencies

There are three main credit reporting agencies. They are also known as credit bureaus.

The three credit reporting agencies are:

• Experian
• Transunion
• Equifax

These companies compile records from banks and other lenders. They track all of your financial transactions. This can include transactions from credit cards, mortgages, or car loans. It can even include unpaid medical bills and utilities.

If you ever have a bill go to collections, these companies know about it. If you apply for a new loan, the lender can request a credit report from each of the three companies. The report will tell the lender all of your current balances and your payment history. Based on what is found in the report, each agency will assign a FICO score that ranges from 300 to 850.

FICO or Fair Isaac Corporation developed the scoring system that is used by all the credit reporting agencies. The main factors used in determining your FICO score are:

• Payment History
• Debt/Amounts Owed
• Age of credit history
• New credit/inquiries
• Mix of accounts/types of credit

Below is a general guide to credit score ranges according to Experian.

	Description	What You Can Expect	Statistics Show
Above 800	Well Above Average	An easy approval process; low interest rates on loans	1% of borrowers with this credit score will become behind on payments.
740-799	Above Average	May qualify for lower interest rates	2% of borrowers with this credit score will become behind on payments.
670-739	Average	Considered an 'acceptable' borrower	8% of borrowers with this credit score will become behind on payments.
580-669	Below Average	Considered a 'subprime' borrower; you may find it hard to get accepted; if you are accepted, you will usually pay a higher interest rate	27% of borrowers with this credit score will become behind on payments.
Below 580	Poor Credit	Usually rejected when applying for a loan; if accepted, will have to pay a deposit; usually have to pay deposits for utilities; many people in this range file bankruptcy	62% of borrowers with this credit score will become behind on payments.

The 5Cs of Credit

When you apply for any kind of loan, the lender will look at a variety of factors to determine whether to loan you money. The credit score is just one of the factors, and most lenders examine five factors.

Interestingly, all the factors begin with the letter C, and are often referred to as The 5 Cs of Credit.

1. Character – generally refers to a borrower's reputation, in other words, your credit history. These are the items that are found in your credit report. Have you paid your payments on time in the past?
2. Capacity – usually considered the most critical factor, capacity refers to how you will repay the loan. In other words, where is the money going to come from? Do you have a job? How much do you earn? Is what you earn enough to meet all of your other debt obligations?
3. Collateral – if you are applying for a secured loan (car, house, etc.) the lender will want to evaluate the collateral. For example, they will not want to loan you $20,000 for a car that is only worth $10,000.
4. Conditions – Many lenders will want to know how you plan to use the money being loaned. They may also look at general economic conditions in the area.
5. Capital – lenders will want to look at your household's capital or money. They want to know that if you lose your job, you will still be able to repay the loan. They will want to see savings and checking account statements, and any other investment balances.

Building and Maintaining a Good Credit Score

Read Credit Score Basics from Experian for tips on building and maintaining good credit.

• Set a budget and live within it.
• Do not use credit to live beyond your means.
• Pay your bills on time.
• Keep your credit balances well below the credit limit.
• Have a mixture of credit types (car loan plus credit card, for example).
• Only apply for the credit you need.
• Have a stable job - don't change jobs every year.
• Start small. Your first credit card might be from a department store or gas station with a low credit limit ($300-$500).
• Consider a credit starter loan from a bank or credit union. This is a loan that is secured by money in a savings account.

Teenagers start off with no credit history. In order to be accepted for a mortgage or even a car loan, you will need to build a credit history. Follow the tips listed above, and you will be able to build an exceptional credit score.