Credit Reports – Part II – A Detailed Look at Credit Reports
In August 2023, our blog titled, “Credit Reports – Part I – Overview” discussed credit reports generally, why lenders need them and what the credit scores mean. In this blog, we will go into more detail about the data on credit reports and how scores are calculated.
What is a Credit Report?
A credit report covers your personal information and your entire credit profile translating into a credit score.
Information on a Credit Report
Personal Information: Includes your name, confirmation of social insurance number (if it has been provided), current/previous addresses, date of birth and current/previous employers. When checking your credit report, verify that this information is correct.
Credit Account: Shows the types of credit accounts that are open and their details including payment history. These can include a line of credit, credit cards, mortgage and consumer loans. Any accounts closed within the last 6 years will also appear.
Inquiry Information: Shows hard and soft credit inquiries. A hard inquiry, or hard check, allows lenders to take a detailed look at your credit history and will drop your credit score by a few points. These typically occur when you apply for new credit or services. A soft inquiry allows lenders to quickly review your credit score and report. It is used primarily for pre-approval offers or background checks and does not impact credit scores.
Bankruptcies, Collections, and Other Public Records: Includes bankruptcies, collection records, court judgments, child support payments etc. These will show on your credit report for 7-10 years.
The contents of the credit report represent overall creditworthiness of an individual and is reflected in the credit score. But how is the actual credit score calculated? The answer is that several factors are assigned a weight that, taken together, translates into the credit score.
Calculation of Credit Scores
- 10% - Application Frequency – This section tells lenders how frequently you are applying for credit. Too many credit applications in a short period of time can be worrisome to lenders as they might interpret this as a sign of financial difficulty.
- 10% - Mix of Credit Types – This refers to the multiple types of revolving and installment loans including loans, mortgages, credit cards, car loans etc. that you may hold. A diverse credit mix shows that you are capable of managing multiple credit accounts.
- 15% - Length of Credit History – This section details how long your oldest and most recent accounts have been open.
- 35% - Payment History – This gives lenders a snapshot on how you have made payments on your existing credit. This also includes late or missed payments, bankruptcies, delinquencies, and other financial events.
- 30% - Credit Utilization - This is a measure of how much credit you have available versus how much you have used on your revolving lines of credit. A revolving line of credit is mainly used for credit cards and it allows you to borrow, repay and then reuse the credit line up to the available limit. It is a good idea to keep credit utilization from 10 - 30% to avoid looking like you are overextended.
Depending on your credit profile, the data on a credit report can be quite detailed. Understanding which key elements are important to lenders usually requires the services of a professional.At LFS, we can help you navigate your credit report. If you have any questions, reach out to us. We’re here to help!