Credit Report Terminology: Understand Your Report
You have probably heard about your credit report at some point in your life. That's normal since just about everything revolves around it. That being said, you need to gain a full understanding of the credit report, what it means for you, and the credit report terminology that people use. We will discuss all of those aspects and a little bit more in this piece. Our goal is to give you a full understanding of your credit report so that you can start making your report work in your favor.
Most Frequently Used Credit Report Terminology
Now you need to know some of the most commonly used credit report terminology. Understanding these terms will help you to understand where you are in the credit world and take actions that will help you to make that position better.
Credit Score
Credit score is probably the single most commonly used phrase of credit report terminology. It refers to a three-digit number that gives a depiction of your overall creditworthiness. Five factors make up the complete credit score. They include payment history, amounts owed, new credit, credit types, and length of credit history. Payment history makes up 35 percent of your overall credit score, and amounts owed make up 30 percent. The length of your credit history makes up 15 percent of the score. New credit and types of credit each make up 10 percent. All of these factors create a monthly credit score that ranges according to the way you manage your credit.
FICO Score
A FICO score is the same thing as a credit score. The FICO scale is the most widely used credit scoring system in the nation. Other scoring systems exist, but they are not utilized enough to create a uniform usage rule.
The FICO score system uses the previously-mentioned factors to generate scores, and those scores range from a low of 300 points to a high of 850 points. Lenders view FICO scores as being either poor/bad, fair, good, very good, and excellent. You have excellent credit if your FICO score is more than 800 points. At that point, you can gain approval for just about anything your heart desires. Poor credit is at the opposite end of the spectrum. You will probably receive many denials if your credit score is lower than 580 points.
Personal Information
Personal information is a self-explanatory term. It's all the data in your credit report that has to do with identifying you. Personal information includes information such as your address, phone number, name, and employment information. It's very important to keep this information updated at all times. Some lenders review personal information and base their decisions on it. For example, a lender may want you to be at the same address for two or three years before they extend you a financial product. Furthermore, they may want to see that you have worked at a stable place of employment for a specified amount of time. You can ensure that they see such information by making sure that you update it regularly.
Payment History
Your payment history tells the story of how well you make the payments on the account. Creditors report your payments monthly on your credit report. You will generally see a symbol for "paid as agreed" or a checkmark on your credit report for each month that you make a timely payment. Many lenders will not report your payment as late until it is 30 days late. At that point, it may show up on your report as 30 days late. You can also be reported for being 60 days late, 90 days late, 120 days late, and so forth. Late payments will impact your credit score immensely. They can be doubly damaging because they will stay on your report even if you pay the entire balance of the account off. Potential lenders will still see the late payments if the creditor chooses to report that particular account. Thus, it's imperative that you do everything in your power to take steps to ensure that you never make a late payment.
Trade Line
Trade line is a term that refers to the various accounts that you have on your credit profile. Each account is known as a trade line, and it's an agreement between you and the creditor or lender. Other names for the trade line include credit account and account.
Balance
The balance is the amount of money you owe on a particular credit account. You accumulate a balance each time you use your credit card or spend money on your credit line. Auto loan accounts, installment loans, and mortgages come with a balance that you have to pay down each month until your principal is gone.
Grace Period
A grace period is an amount of time that a lender will allow you to go past the payment date without adding extra interest or otherwise penalizing you with late fees or something else. Your auto loan lender may give you a 10-day grace period, for example. That means that you have until the 11th of the month to make a payment that is due on the 1st of the month without any adverse actions from the lender.
Charge-Off
A charge-off is a negative credit item that occurs when you go delinquent on an account for a certain number of days. The original creditor may then write off or charge-off the account to get a tax credit. That doesn't mean that you no longer have to pay the debt. In most cases, creditors turn the debts over to collection agencies who go after the debtor for the funds. A debt collector can place a negative account on your credit report.
Delinquency
Delinquency is a term that means that you have defaulted on a loan. You have not honored the commitment that you made when you first signed up for the financial product. All loans and credit cards consist of contracts that you sign at the time the lender approves you. Therefore, a lender will render you delinquent if you fail to pay for your debt or if you ask them to let you out of the contract.
Collection
Collection or collections is credit report terminology that means a debt collection company has picked up an account of yours. These persons will place the account on your credit report and continue to try to collect it from you. It can stay on your credit report for up to seven years.
Statute of Limitations
The statute of limitations is the amount of time that must pass before a negative credit item can "fall off" of your credit report. At this time, lenders and collection agencies may no longer collect such a debt. In general, bad debt comes off of your credit report after seven years. Certain circumstances can make that time period shorter or as long as 10 years.
Authorized User
An authorized user is a person that you designate to perform various tasks on your credit account. You may, for example, authorize this person to make charges to your credit card. You could also authorize this person to talk to your creditors about your balances and payments. In some cases, you can allow an authorized user to make changes to your account. You are responsible for every action your authorized user takes regarding your account.
Utilization
Utilization is a figure that represents how much you use your available balance. Your utilization is 50 percent if you use up $500 of a credit card that has a $1,000 limit on it. Typically, you need to keep your utilization down to 30 percent or below if you want to maintain a healthy credit score.
DTI/APR
DTI is an acronym that stands for debt-to-income ratio. The number is calculated by dividing your monthly income by your monthly expenses. It's a straightforward figure that gives potential lenders an idea of your obligations. The DTI plays a huge role in some lenders' decisions when they consider opening new accounts for applicants. Certain lenders will not approve an application unless the applicant has a DTI lower than 45 percent. Such is the case with many mortgage lenders.
APR stands for annual percentage rate. It's the interest rate that you will pay for a certain credit time. A credit card, for example, may have a 29.99 percent APR. An auto loan is more likely to have an APR of around 15 percent unless your credit is in the lowest tier. Then you might be facing an APR that's closer to 30 percent. It's always wise to find out the potential APR before you apply for credit. Remember that you don't have to sign for a deal that offers an APR you're not happy with.
Credit History
Credit history refers to the complete history of payments and activities on all the accounts in your credit profile. It shows how many accounts you have, the number of payments you've made, and the balances you have on each account. It also shows whether you have any accounts in collections or you have public records. You can say that credit history is another term for your credit report.
Public Records
Public records refers to a specific set of adverse accounts that show up on your credit report. These adverse accounts are also a matter of public record. They include bankruptcy, tax liens, judgments, and the like.
Inquiry
An inquiry is a request by a potential lender, employer, housing establishment, or some other such individual to see the contents of your credit report. You generate a credit inquiry every time you apply for a credit card, house, car, personal loan, or something similar. What you might not know is that those inquiries go on your credit report and remain there for two years. Potential lenders do not like to see a long list of inquiries on an applicant's credit report. They like to see maybe one or two every two years. Anything more than that is excessive in the eyes of creditors, and it can cause you to get turned down even if the rest of your credit history is positive.
Furthermore, credit inquiries drop your credit score. Each one that you conduct could potentially drop your score three points or more. You should only complete an inquiry if you truly need the product or service, and you believe you have an excellent chance of getting approved for it. In some cases, you can find out the likelihood from the credit-issuing company. Ask them what the criteria is for approval, and be sure that you ask what credit score range is likely to get you an approval. Don't continue with the application process if your score is too low to meet those standards.
Hard Pull/Soft Pull
A hard pull is a credit report terminology word that refers to the type of inquiry a potential lender performs on your credit profile. A hard pull is a credit pull that affects your credit profile and score. The inquiry will remain on your credit report for two years if you decide to have the potential lender run your information.
A soft pull is the opposite of a hard pull on your credit report because it does not result in a hit to your score. Generally, lenders do hard pulls, but there are some situations where one might need to do a soft pull. One situation is where the lender is trying to prequalify you for something, such as a credit card. A company such as a car rental company might do a soft pull on your credit, as well.
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Basic Credit Knowledge and Tips on Maintaining a Great Credit Score
The Importance of Your Credit Report and Score
As we said before, your credit report and score are crucial to your survival. That's not an overstatement. It's extremely difficult for any consumer to navigate life without a positive credit score and report. Potential lenders will review your credit score when you apply for loans and financial products. Employers will consider your credit report before they hire you in some cases. Apartment complexes and housing institutions will decide whether they want you to live on their properties based on your credit score and report. Therefore, you will need to have a positive credit profile if you want to get ahead in life in any way.
How to Boost Your Credit
Knowing the credit report terminology is only half the battle when it comes to being a personal finance champion. You'll also need to know how to manage your credit so that your score is always improving. Making timely payments is the number one piece of advice we can give you. You must never make a late payment since your payment history is such an integral part of your score.
The second part of staying on top of your credit is making sure that you keep your inquiries and utilization down to a minimum. Using only 30 percent of your available credit shows lenders that you are responsible rather than desperate. Keeping your inquiries low will give you the look of confidence when prospective lenders review your profile.
Checking your credit score frequently is a golden rule for managing your finances. Order your credit report at least once a year and address any problems that you see right away. Dispute balances that you feel are inaccurate and accounts that you don't believe are yours. The credit bureaus must investigate all claims and remove items that they can't legitimately tie to debtors. You'll get ahead of the game in no time if you follow these instructions.
How to Get Your Credit Report
The first step to getting where you need to be in the realm of credit is to obtain credit report information about yourself. Fortunately, it's relatively easy to get your credit report online. The major credit bureaus are obligated to give you a copy of your credit report for free at least once every year. They must also provide you with your credit report if you request it after a potential lender has turned you down for credit. You have 60 days from that date to obtain your credit report. All you need to do to get your report is to request it.
Final Thoughts
You should now have a well-rounded knowledge of most of the credit report terminology that is relevant to your credit report. Knowing that information can help you navigate your report and your score and return to a healthy financial profile. Don't hesitate to contact us if you need some additional information. We are a multi-service consumer advocate that has a broad range of resources that can help you with personal finance.
We can get you connected to lenders, credit and debit specialists, financial advisors, and more. You can also find a wealth of information on our site if you'd rather take a self-help approach to achieve financial freedom. It's up to you. We will be here to support you, no matter which method you choose. All you need to do is reach out to us by telephone or short form. We'll begin our mission to help you immediately.