How Your Credit Report Affects Your Credit Score...and What That Means to You

A Credit Article Contributed by Christy Patrick

Your Credit Report's Credit Score

The easiest way to understand your credit score is to think of it as a simplified version of your credit report. Your credit report gives all of the details of your credit history including any loans or credit cards. It gives information on these accounts such as when they were opened and what your current balance is, as well as details of any missed or late payments. Lenders look at your credit report to determine whether or not they want to grant you credit.

Your credit score is, well, just that: a score. It's a number that quickly lets lenders know if you would be high risk or low risk as a borrower. Think of it as your Grade Point Average and your credit report as your transcript: your G.P.A. does not give the full history of your academic career, but it does give colleges a good understanding of how you'll do at their institution.

How Your Credit Report Determines Your Score

Your credit score, then, is determined by your credit report, but how exactly? Essentially, each different factor of your credit report is given a different percentage of weight towards determining your score. So, for instance, 35% of your score is determined by your payment history. If you made many late payments, or had your account passed over to a collection agency, it would be factored in here.

Another 30% of the score is determined by the amount of debt you are in. Any credit cards that are at the maximum balance and any loans that are not yet paid would be included in this portion of your score.

The rest of the score is made up from a combination of what type of credit you currently have, how long you have had credit, and how many inquiries there have been for your credit report. The longer you have had credit, the better it will be for your score, because a longer history of credit means a clearer understanding of how you behave as a creditor. The fewer inquiries made regarding your credit report, the better, because more inquiries mean more applications for credit, which means you might be in some financial hardship and are taking on more debt.

Steps to Improving Your Credit Report and Credit Score

So, what does this all mean? Well, it means to improve your credit score, you must improve your credit report. Since your credit score is the simplified version of your credit history, it is the part most looked at by lenders. Therefore, it's important to have the best score possible.

If you find that you have a poor credit score, there are steps you can take towards improving it. First, and most importantly, pay your bills on time! Although it will take time for this to be reflected in your score, it's the surest way of doing it. Also, don't let anyone make an inquiry to your credit report unless absolutely necessary. In addition, close any accounts that you no longer use, and reduce the balance on your credit cards to at least 25% below the maximum balance.

Finally, review your credit report on a regular basis and correct any errors that you find. You don't want to be turned down for that student loan because of the CRA's mistake.