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  • Writer's pictureTaylor Perry

Building Credit | Part Three: Credit Reporting & Scoring

Updated: Dec 4, 2020

In Part Two of our blog series on building credit, we discussed important factors that help determine your creditworthiness; this week, we’ll be diving into more detail. Each time you apply for a credit card or loan, lenders decide whether or not to approve your application based on your credit report, credit score, and payment history. Read on to learn how to leverage these components to improve and maintain your creditworthiness.

What is a credit report and how does it affect my credit score?

Your credit report outlines your past use of credit, which helps lenders decide whether or not to approve your credit application. Your credit report also helps lenders decide what interest rates to charge you; the better your credit report, the better your interest rates.

Credit reports are compiled by three main companies:

  • Equifax

  • Experian

  • Transunion

These companies, known as credit bureaus, receive regular reports from banks, credit card companies, retail stores, and mortgage lenders. Your credit score is calculated using this information.

A high credit score leaves a favorable impression with lenders. Credit scores range from 300 to 850; the higher, the better. Having a good credit score indicates to lenders that you are reliable and financially trustworthy, increasing your likelihood of approval for a loan or line of credit. Lenders also assign interest rates on loans and credit cards based on borrowers’ credit scores.

Your credit score is based on 5 elements from your credit report:

  • Payment history: consistent, timely payments

  • Credit utilization: the percentage of available credit that is currently being used

  • Length of credit history: the average length of time each credit account has been open

  • How often you open new accounts: note that opening new accounts at the same time will lower your score.

  • Credit mix: repaying a variety of debt products, such as mortgage payments and credit cards, shows lenders that you can handle multiple types of credit.

What is included in my payment history?

Responsible use of credit accounts in the past strongly affects your credit score. Payments on several types of accounts are included in your credit report:

  • Credit card accounts, including retail accounts such as department store credit cards

  • Finance company accounts, which are often used to finance large purchases such as home appliances

  • Installment loans, such as a car loan

  • Mortgage loans

Your credit score also takes into account public records and collections items, such as:

  • Bankruptcies

  • Accounts in collections, including unpaid utility or medical bills

  • Unpaid taxes

  • Foreclosures

Late or missed payments play an important role in determining your credit score. Credit bureaus consider specific details regarding late or missed payments, such as:

  • How late the payment was

  • How much was owed

  • How recently the late or missed payment occurred

  • How many late or missed payments you’ve had in the past

Late payments, collections notices, and foreclosures remain on your credit report for seven years; bankruptcies can remain on your report for up to 10 years.

How can I improve my credit score?

  • Establish a steady work record.

  • Pay all bills promptly.

  • Open a checking account and avoid bounced checks.

  • Make regular deposits to a savings account.

  • Apply for a local store credit card and make regular monthly payments.

  • Apply for a small loan using your savings account as collateral.

  • Get a co-signer on a loan and pay back the loan as agreed.

  • Check your credit report annually and resolve any errors.

Next week we'll cover credit restoration in the final installment of our four-part series on building credit. Subscribe to our blog below to receive an email notification each time we publish a new post.

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