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Your personal credit report acts as a gateway to your financial future.

That could be a better future or… not so much. 

The good news is you’re in full control of what shows up on your credit report, so you ultimately decide that future. 

Take on a bunch of debt you can’t pay off or miss payments on a regular basis and you’ll quickly find yourself financially handicap.

That’s because your credit score and report help you obtain a number of important things such as:

  • Home mortgage
  • Car lease
  • Personal or business loans
  • Credit cards
  • Cell service and smartphone leasing

Fortunately, you’re here, doing what needs to be done to understand your personal credit report so you can invest in your financial future. 

And that’s exactly what we’re going to help you with in this guide. Below, we’ll be covering:

  • Reading your personal credit report
  • How your credit score is calculated
  • What is a good credit score?
  • And tips for cleaning up your credit report and improving your credit if it’s not where you’d like it to be

Let’s get to it. 

A note on obtaining your credit report

If you haven’t already obtained a copy of one of your credit reports (no matter from which credit bureau), it’s suggested you have that as we go through this guide. 

Having it on hand will allow you to make notes and mark it up with areas that need attention, whether that’s improvement, removal, or simply some research. 

According to the FCRA, or Fair Credit Reporting Act, you’re allowed one free copy of your credit report from each of the major credit bureaus: TransUnion, Equifax, and Experian. 

To get a free copy of your credit report, go to AnnualCreditReport.com (the only service licensed by the federal government to provide free credit reports).

Reading your personal credit report

Your credit report is a collection of your financial data (such payment history, current debt) gathered by a credit bureau, typically one of the major bureaus in Experian, Equifax, or TransUnion. 

Access to your credit report can be requested by you or anyone you authorize to run your credit for the purpose of using your credit score and/or report to help grade your financial eligibility. 

The information on your credit report is separated into 4 major sections:

  • Personal information
  • Credit history
  • Credit inquiries
  • Public records

Personal information

This section includes basic information such as your name, address, and phone numbers:

Credit history

Credit history includes credit accounts, how much you owe (if anything), how long the account has been open (or closed), and whether you’ve ever been late on payments:

Credit inquiries

When you apply for credit, that company or lender will run a hard inquiry on your credit, which impacts your credit score immediately up to 1 year and lasts on your credit report for up to 2 years. 

Those inquiries appear on your credit report in the proceeding section, typically just after your accounts:

EXCELCAPITAL - UNDERSTANDING YOUR PERSONAL CREDIT REPORT

Public records

Finally, public records includes all assorted items such as judgments, liens, bankruptcies, and foreclosures

Once you understand how your report is structured and what is included in each section, it’s much easier to read through your report. 

However, there are some confusing terms that show up in credit reports you’ll want to know as well to make sure you understand everything that’s included in one of your credit reports.

EXCELCAPITAL - UNDERSTANDING YOUR PERSONAL CREDIT REPORT

A quick breakdown of all those confusing credit report terms

Here’s a quick breakdown of some of the most common terms that may appear on your credit report:

  • Collection account: When a debt can’t be collected, large companies tend to sell that debt off to a debt collector. That account will show up as a collection account. 
  • Charge-off: You might notice that some of your credit accounts say “Charged-off”. This means the creditor has given up on trying to collect the debt and written that debt off as a loss on their taxes. That debt may or may not have then been sold to a debt collector, so check to see if that same debt shows up as another account under a different name. 
  • Open account: An open account includes any financial responsibility to which you pay off each month, such as a cell phone or utility bill. 
  • Revolving account: This includes revolving credit accounts to which typically a portion of the balance is paid each month such as credit cards.

For a list of additional terms and codes that may appear on your credit report, several credit bureaus and other financial institutions offer handy guides, such as Creditfirm.net

Understanding your credit score (as it relates to your credit report)

Now that you understand how to read your personal credit report, let’s dive into your credit score. 

Your credit score is a direct reflection of the state of your credit report. 

If you learn what factors impact your credit score and how to read your credit report, you can put that knowledge together to vastly improve your credit. And you can do it often within a relatively short period of time. 

*Getting 9002 or 9003 credit when running your credit score? Find out what it means and what you can do about it. 

How you credit score is calculated

Credit agencies such as FICO and VantageScores take the data collected by the various bureaus to calculate your score. 

After calculating the data, they produce a score somewhere between 300 and 850 based on various factors, one score for each major credit bureau. 

It’s these agencies that calculate and produce your score, not the credit bureaus themselves. This is an important differentiation that’s critical to understand if you want to fully comprehend how your credit report and score work.

What factors impact your score? 

So then, how is your credit score calculated? 

There are 5 major items from your credit report that impact your score and these are the items you should be looking for when reviewing your credit report for possible improvements.

Below, we’ve organized those major factors in order of importance. The percentage (out of 100% total) indicates how important that particular factor is in calculating your score:

EXCELCAPITAL - UNDERSTANDING YOUR PERSONAL CREDIT REPORT

  1. Payment history: 35%
  2. Credit utilization: 30%
  3. Credit history: 15%
  4. Credit mix: 10%
  5. New credit: 10%

Payment history: 35%

Easily the most important factor when it comes to calculating your credit score at 35% of your score, payment history accounts for just over ⅓ of your entire score’s calculation. 

This includes the number of on-time payments, late payments, and when those payments were made.

Suffice it to say, try to never be late on a payment. 

However, it’s also important to note that FICO and other agencies state a couple of late payments aren’t going to kill your score. 

It’s much more of a collection of factors taken together than any one thing dominating the scoring calculation. 

Credit utilization: 30%

The second of the two most important factors in calculating your credit score is credit utilization. Taken together, payment history and credit utilization account for 65% of your score 

Credit utilization takes into consideration the amount you owe, particularly what percentage of your available credit you’ve borrowed from. 

The less you’re borrowing from your available credit, the better your score.

For example, it’s generally advised to use no more than 20-30% of your available credit. If you have a $250 credit card, another $500 card, and a final card with a $1000 limit, your available credit is $1750. 

However, you should shoot for spending just $350-525 of that amount (the less the better). 

Credit history: 15%

Most notably, this takes into consideration the age of your credit accounts. 

The longer your accounts have been open, the better your credit score will be. However, this also accounts for how long you’ve been actively using those accounts.

Ideally, you should have multiple accounts open for a long period of time all which you’re also actively using, even if it’s only a small portion of the available credit.

Credit mix: 10%

Credit mix accounts for just 10% of your score’s calculation and it has to do with the combination of credit accounts you have on your report.

This one is a bit vague, but it’s generally suggested that a good mix of revolving and installment accounts of different types is best. 

The idea is that it indicates the borrower (you) can handle different types of credit, further increasing your credit score. 

New credit: 10%

New credit is the final element and it accounts for another 10% of your score.

This includes two different things: 

  1. New inquiries
  2. New credit accounts

First, soft inquiries don’t affect your credit. However, hard inquiries– such as when a car dealership or bank runs your credit for a loan– do impact your credit and stay on your credit report for up to 2 years. 

Second, opening several new accounts within a small window of time can also impact your score, as it can suggest that you’re in financial trouble. 

However, something else not often considered: opening new accounts lowers your average account age, which also impacts your credit history. 

EXCELCAPITAL - UNDERSTANDING YOUR PERSONAL CREDIT REPORT

Tips for improving your credit

Now that we’ve covered what to look for on your credit report to start building toward a better credit score, we’ll cover some of our best tips for improving your credit.

Here are tips for improving your credit: 

1. Get credit monitoring

One of the single most important things you need to do if you’re serious about working on your credit is credit monitoring.

Credit monitoring, through sites such as Credit Karma, gives you a gateway into your credit activity. 

It will tell you not only when something has positively or negatively impacted your score, it will tell you when new items are added to your credit report, and help you identify credit fraud swiftly.

2. Remove old, erroneous, and fraudulent items

If you haven’t been keeping an eye on your credit report all this time, chances are that one or more items have landed on it that can be removed.

This includes items that: 

  1. simply old and should have fallen off
  2. Erroneous items such as credit accounts being listed twice, and
  3. Fraudulent items you might never have noticed

Examples of items you might see and be able to remove from your credit report include a UCC filing or UCC lien, which often stay on your credit after they’ve expired and can easily be removed, tax liens, or judgments

Sometimes, companies will run your credit without your authorization. If you notice an inquiry you know you did not permit, you can request to have it removed.

Another example is a credit account which you’ve paid off or has been charged off, both of which can often be removed in some cases. 

3. Pay on time, no matter what

As we talked about earlier, your payment history accounts for ⅓ of your entire credit score. 

That means making sure that you’re paying on time is one of the single most important things you can do to improve and maintain your credit score. 

Don’t forget that if you’re having trouble paying something on time, you can call most companies and request an extension. Many industries offer up to 2 extensions a year (or more), which means you have flexibility if need-be. 

4. Optimize your credit utilization

Similarly, credit utilization is nearly ⅓ of your entire score. 

Many aren’t aware of the importance that credit utilization plays in terms of your credit score. And, if they are, many more aren’t aware of just how much of their credit they should be spending. 

Most sources will suggest you keep your credit utilization below 30%. This is technically true. However, if you keep it to under 20%, the difference is significant and it requires just a little extra self-restraint.

Alternatively, you can look into whether you’re available for a credit limit increase from any of your credit cards. 

Get to know your personal credit report

You credit is a gateway to some of life’s most important moments: your first (or next), a new home, or obtaining a business loan for your passion project. 

Your credit report deserves your time and attention. 

Not only to understand it but to get it into the right shape so that it becomes an asset that helps you get to those major financial achievements, as opposed to a hindrance. 

Get to know your personal credit report. Then work on cleaning it up and bolstering it with a clean payment history, low credit utilization, and plentiful amount of credit.