Uncovering the Mystery that is Your Credit Report

A credit report can either be the key to or road block to getting access to credit. Whether you’re looking to take a trip or purchase a home, your credit history plays a big role in how much you can borrow at what rate.

While most of us are aware of how important good credit is, many of us don’t know what our scores are or how to improve them.

Luckily popular credit card companies like Discover Card and American Express have started to provide free credit reporting to customers. In addition there’s CreditKarma.com which is a completely free credit reporting service.

Credit Karma provides users with their credit score overview and detailed description of credit factors. If you’ve never dug into your credit score before you may be confused as to how the number is generated. The following are factors that impact your credit score:

  • Credit card utilization
  • Payment history
  • Derogatory marks
  • Age of credit history
  • Total accounts
  • Credit inquiries

Each of these factors has either a high, medium or low impact on your credit score. While they all impact whether you have poor, good or excellent credit some are more important than others. When attempting to improve your score it’s important to pay the most attention to those factors which have a high impact on your overall score.

High Impact

Having a high impact means that these factors can significantly increase or decrease your credit score. Factors that have a high impact on your score are: credit card utilization, payment history and derogatory marks. Credit card utilization is calculated by comparing the amount of credit you have access to and how much you are currently utilizing. In order to have excellent credit you must only utilize 0% to 9% of your available credit. Someone with a good credit score utilizes between 10% and 29% of their available credit. To have a poor credit rating means that you are utilizing 50% to 74% of your available credit. Payment history and derogatory marks also heavily impact your credit score. As long as you make your bill payments on time you should have an excellent rating.

Medium Impact

Age of credit history has a medium impact on your credit score. Creditors are interested in the age of your credit history, because it helps provide a better picture of your ability to repay debt. If you have no derogatory marks on your credit history, and you’ve never missed a payment but you’ve only had a credit card for 6 months a creditor can’t determine with absolute certainty that you’re capable of repaying debt. Here’s how age of credit history is ranked:

  • Excellent – 9+ years
  • Good – 7 to 8 years
  • Fair – 5 to 6 years
  • Poor – 2 to 4 years
  • Very poor – less than 2 years

Unfortunately there’s not too much you can do to improve the age of your credit history. It is important to keep old cards alive, especially if you are in the fair to poor range. Your first credit card may have been a store card or may not have the best interest rate, but the age of the card can help with your credit history. Keep these accounts from closing by spending a small amount from time to time, and paying debt off right away. This will help maintain your current age and keep it from decreasing.

Low Impact

There are two additional factors that impact your credit score. The total number of accounts you have open, and amount of credit inquiries performed have a low impact on your credit score. The total amount of accounts you have open include student loans, mortgages, credit cards and other loans. In order to have an excellent score you need to have 21 or more accounts active. To fall within the poor score you’d need to have less than 10 accounts open. Any time a creditor runs a credit inquiry your credit score is impacted. Applying for a credit card, car loan or any other type of funding can impact your credit score. Even just one hard inquiry can move your score down from Excellent to Good.

Staying on top of your credit report is important. Not only can it help you improve your credit and odds of getting approved for loans, but it can also help you prevent fraudulent activity. By monitoring credit inquiries you can find out if someone is attempting to take out a loan or credit card in your name before it’s too late.

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