Before financial institutions lend credit to a consumer, they check the credit report and credit score of the applicant. The credit score reflects the creditworthiness of an individual and thus is the reference point for lenders to investigate the payment history and capabilities of a consumer.[br]
Credit Report and Credit score: What Are They?
A credit report is the complete credit summary of a consumer. Although a credit report is a document of many pages and has codes, understanding your credit report is essential for analyzing your creditworthiness. Reading a credit report lowers the chances of identity theft and other factual or clerical errors that may occur.
Typically a credit report is divided into five sections, namely:
- Credit summary
- Account history
- Public information
- Inquiries
- Creditor information
Using the data present in the above sections, the credit score is calculated. These scores can be interpreted as numerical filters that differentiate between good borrowers and risky borrowers. They make reading the indications of a credit report easy. All lending institutions use the credit score to evaluate the extent of risk associated with a consumer.
Credit scores are generally between the range of 300 and 850, with the threshold being 620. Consumers with credit scores lower than 620 are considered risky and face difficulties finding a creditor. People in the mid and high 700s enjoy the best offers and interest rates.
Credit scores predict the probability of a consumer missing a payment for more than 90 days in the forthcoming year. Fair Isaac created the algorithm for calculating the scores and, hence, credit scores are also known as FICO (Fair Isaac Corporation) score.[br]
Improve your Credit Report and Credit Score
The key to improve your credit report, and in turn your credit score, is to first understand the factors that impact your credit report. They are:
- Late payments
- High level of credit card debt
- A large number of applications for credit
- Young credit history
- Reporting to collections
- Bankruptcy
- Tax liens and judgments
These factors have to be worked on proactively to improve your credit score and build your creditworthiness.
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