Understanding Your Credit Report and Credit Score

One of the first things I request before engaging with a client to pursue a new loan request is your current credit report. I am not a lender, so by law I cannot access your credit report. Only the bank or other loan intermediaries can contract with the credit report providers for that information. You can obtain your credit report by going to the Internet and ordering your credit report online. The report is issued immediately, which you can save and print.

What lender’s look for is a Tri-merge report, which is the credit scores from all three credit report providers. The first item they look at is what your FICO Score is. FICO Scores can range from a low of 450 to a high of 850. The higher the score the better your credit history. Scores should range in the 700s when applying for a business loan.

What Makes Up A FICO Score?

Factors Effecting Your Credit Score
Credit Score Factors

The approximate makeup of the FICO score used by U.S. lenders Credit scores are designed to measure the risk of default by taking into account various factors in a person’s financial history. Although the exact formulas for calculating credit scores are secret, FICO has disclosed the following components:

  • 35%: Payment history—Late payments on bills, such as a mortgage, credit card or automobile loan, can cause a FICO score to drop. Bills paid on time will improve a FICO score.
  • 30%: Credit utilization—The ratio of current revolving debt (such as credit card balances) to the total available revolving credit or credit limit. FICO scores can be improved by paying off debt and lowering the credit utilization ratio. Alternatively, applications for and receiving the credit limit increase will also drive down the utilization ratio. The closing of existing revolving accounts will typically adversely affect this ratio and therefore have a negative impact on a FICO score.
  • 15%: Length of credit history—As a credit history ages it can have a positive impact on its FICO score.
  • 10%: Types of credit used (installment, revolving, consumer finance, mortgage)—Consumers can benefit by having a history of managing different types of credit.
  • 10%: Recent searches for credit—Credit inquiries, which occur when consumers are seeking new credit, can hurt scores. Individuals shopping for a mortgage or auto loan over a short period will likely not experience a decrease in their scores as a result of these types of inquiries, however.

While all credit inquiries are recorded and displayed on credit reports for a period of time, credit inquiries that were made by the owner (self-check), by an employer (for employee verification) or by companies initiating pre-screened offers of credit or insurance do not have any impact on a credit score.

There are other special factors which can weigh on the FICO score.
• Any money owed because of a court judgment, tax lien, etc. carry an additional negative penalty, especially when recent.
• Having one or more newly opened consumer finance credit accounts may also be a negative.

It is important also to review your credit report for accuracy. There are many times I have review a report and the information the credit report providers have is wrong. You can challenge the inaccurate information, as long as you have supporting information or if not, you can write the actual events as you know them to be in the section requesting information by the credit report provider. They will follow up with the entity that provided that information, and if it is incorrect, they will change the history.

In some cases I have seen FICO Scores change upward by 50 points when challenged by a person. Remember not all the information is accurate and that is what a bank is relying on in making their loan decision.