September 30, 2023

How to Read Your Credit Report

Whether you’re interested in getting a mortgage, car loan, or new credit card, it’s essential you know the likelihood of getting approved. The biggest thing determining your eligibility is your credit report, as it provides a detailed history of your past and current relationships with creditors.

If you’re in over your head with debt and are using something like this pay off loan calculator, you first need to know how you got here and what you can do to get out of your situation. It may involve getting a debt consolidation loan or applying for a balance transfer credit card, but first, you need to know whether you’ll be approved or not. So before hitting that “apply” button, let’s talk about how your credit report works and the factors you need to know that affect your credit score and ability to borrow more money.

Why your credit report matters

Your credit report and score are crucial elements to understand as they can be the thing that prevents you from making any significant lifestyle changes.

When you apply for a loan or credit card, your credit report and FICO© Score (or VantageScore©) are pulled by your potential creditor to see how you’ve handled borrowing money in the past. FICO scores range from 300 – 850, with 850 being the best score possible.

Based on the information your report shows, your creditor will decide whether or not your score meets their minimum requirements to issue your loan.

If your score is too low, your application may be rejected. Not only will you not be able to get that money you need, but there will also be an additional negative mark on your credit score, known as a “hard pull.” Hard pulls are discussed further down this article, but for now, you should know that too many pulls on your credit report will negatively affect your potential to get approved for loans or credit.

If your score meets the minimum requirements but isn’t much higher than that, you may be approved for a lower amount of credit or a higher interest rate on your loan.

To get the largest credit line and the most competitive interest rates, you need to ensure your score is the highest possible.

The parts of your credit report and how they affect your credit score

Your credit report is a standardized set of metrics that all three major bureaus (Experian, TransUnion, Equifax) use to determine their credit score for you. Though the metrics are all the same, not all creditors will report your activity to each bureau,  so you may have slightly different scores for each.

The two major factors that affect your credit score are your Credit Utilization Rate and Payment History. These two factors combined account for 75% of your total score.

Credit Utilization Rate

Your Credit Utilization Rate is a percentage of how much credit you use every month against the total amount of credit you have available. Experts recommend keeping your rate under 30%, but the best scores keep a rate of 10% or lower.

Payment History

Your potential creditors want to know they can trust you to pay back the money they’re willing to let you borrow, so the number of late payments on your history is critical. Most creditors will only start reporting payments that are over 30 days late, but if you have a history of missing your deadline by a week too often, that may show up on your report, too.

The rest of the factors affecting your score aren’t as critical, but having a negative mark in any of these could be the factor that stops a bank from offering you credit or approving your loan. These factors include the Age of Credit, Mix of Accounts, and Number of Hard Pulls.

Age of Credit

The length of your open credit lines shows how well you’re able to maintain long-term partnerships with your lenders. This metric is determined by finding the average age over all open lines of credit. Try to shoot for an average age of five years or more.

Mix of Accounts

The best credit scores have a mix of different types of accounts to pull from but don’t worry if you only have credit cards or loans, as this metric isn’t weighed too heavily. However, the best credit scores have a mix of loans and credit cards.

Hard Pulls

Hard pulls are tallied every time you apply for a new line of credit or loan. You may also receive a hard pull for certain jobs that require good financial know-how or have high-level security clearances. The more hard pulls on your history, the more it seems that you’re desperate for credit, even if this isn’t the case. Still, try to keep your hard pulls under three per year. Hard pulls will also fall off your history within three to five years.

There are also “soft pulls,” which credit monitoring and banking apps use. These don’t affect your credit score and do not get reported.

The bottom line

Understanding your credit report before applying for your next loan or credit card will ensure you don’t waste your hard pulls or get denied for that much-needed loan. Keep this guide handy when looking at your score, so you’ll know which areas you need to focus on to have the best score possible.