Understanding a Credit Report

A credit report can often times be confusing and over whelming.  Understanding a credit report can be down right frustrating.  The fact is that a credit report plays so much importance in every day life; when trying to take out a loan, buy a new house, car, or even a cell phone; that understanding a credit report is just as important as knowing the loan you are signing up for.

The information on a credit report can be broken down into a few sections; the FICO score, current lines of credit, outstanding liens or judgment against you, and past credit report inquiries.

A FICO score and often times can be the most important piece of information on the report but often times the most confusing to understand.  Three credit bureaus exist and they all look at your financial background to come up with three different scores.  Often times when taking out a loan your lender will look at the middle FICO score on your credit report.  Just how do they decide what score I have?  Indeed this is not a simple question to answer!  Basically your credit score ranges from a low of 300 to a high of 850.  These numbers indicate to potential lender just how risky of a borrower you are.  This can make or break that deal for your dream home or dream car!  Your score is based on a very detailed system that takes into consideration the amount of time you have had established credit, the current lines of credit you have, and the number of inquiries you made recently applying for loans.  These factors are all weighed together to help determine your score.

Current open lines of credit will be the next section you see on your credit report.  This indicates the current credit cards, loans, mortgages, that you have open.  It tells you the limit of each as well as the balance and any late payments you have had in the past.  There are 2 different credit lines or loans that one can have; revolving credit and installment.  Revolving credit lines are your typical credit cards and home equity loans.  The installment loans are your car payments, student loans, and mortgage loans.  While installment loans typically can have balances close to the original limit of the loan, this is not a bad thing because you are making the same payment.  Revolving credit is the one where you want to pay close attention to the balance and limit.  These lines of credit are better when the balance is at or around 10% of the limit. 

Outstanding liens and judgments on a credit report are a very bad thing.  Almost any time you have one of these on your credit report the lender will not give you the loan until the lien or judgment is settled.  This can be from some payment you failed to make in the past and it never goes away until it is settled. 

Inquiries on a credit report mean that you had someone look at the report possibly to borrow money.  A lot of these can be a bad thing because a lender will interrupt that as other potential lenders looking at the report and failing to fund your loan.  This can mean that a wide range of lenders has already concluded that you are a risk and it would be best not to give you a loan.