How are Credit Reports and Credit Scores Calculated?
How are Credit Reports and Credit Scores Calculated?
If you have ever applied for a loan, looked for an apartment to rent or wanted to get a cell phone of your own, you have probably been asked about your credit history. Just like a person’s reputation, your credit score indicates to others how well you pay your bills and handle your money. Think of it as a financial report card. It’s an important part of becoming a responsible adult.
A credit report is a written file that contains information about you and your loan payment history, including the current status of any credit accounts you have. The report also provides information on:
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the amount of credit you have available to use
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the current balances on debts outstanding
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if your payments have been made on time
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names of any companies you have credit with
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the age of the credit accounts
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types of accounts
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information such as your name, current address, date of birth
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public records such as bankruptcies, judgments, tax liens
Where Does This Credit Information Come From?
Information on a credit report comes directly from companies that have extended you credit in the past or from those with which you have open accounts. These companies include credit unions, banks, auto and mortgage lenders and retailers. The companies report monthly the details of your credit activity to one of the three major national credit reporting bureaus. Credit reporting companies (credit bureaus) then compile these reports.
The three major credit national credit bureaus are:
Lenders use these reports to help them decide if they will loan you money, the interest rates they will offer you, or to determine whether you continue to meet the terms of the account. Other kinds of companies can purchase reports to help inform them while making a wide range of business decisions such as providing or pricing insurance, renting you a residential property, providing you with cable TV, internet, utility, or telecommunication services, and (if you agree to let them look at your consumer report) making employment decisions about you.
Your credit report information is updated and changes every month and will follow you throughout your lifetime. If you regularly pay your bills on time, your creditors will report that positive information that will then reflect positively on your credit score. If you make payments late or miss payments, your creditors will report that negative information as well, which may lower your credit score.
Our credit report and credit score serves as a powerful tool for others to gauge our loan repayment ability and our character. Knowing how it works can help us make better financial decisions for our future.
