What's a Good Credit Score?

Most lenders today are using your credit score to determine your credit worthiness. Just those three numbers that make up your score may not be enough to provide a true picture of your ability or willingness to repay a loan. Understanding your credit report and knowing how to analyze it properly will prepare you to apply for credit and help you provide a picture for the lender so they may better be able to see the person behind the score.

What the lender will see.

Your credit report has become one of the most important tools for the loan officer or lender to use when evaluating your loan application. With more and more consumers applying for credit or financing the lender needs a tool that they can quickly and easily use to evaluate the consumers credit-worthiness.

One of the first things a lender will look at is your credit score. This numerical score alone will give them a quick summary of all the information contained in your credit report.

Because your credit report contains many years of credit history, many lenders consider the score to be one of the most valuable pieces of information on your report. The problem is, there is much more to learn from a credit report than just your score.

You must make sure that the loan officer or lender that is evaluating your application looks beyond the score and examines the other information contained in your credit file. You must also explain in detail any negative information contained in your credit report so the lender can evaluate you and not just your credit report. This is the only way to ensure that you will receive the most favorable terms for your particular situation.

Credit Report Basic Elements

There are three major credit report providers (TransUnion, Experian and Equifax) and they all contain the same basic information. They may look completely different and contain some slight variations but all still provide the same basic information. If you understand the basics you can use this knowledge to provide your lender with the information they need, no matter which report they are using.

The major portion of the credit report contains consumer specific information, a profile summary, credit score, public record information, trade-lines and inquires. Some lenders may use a report that includes optional demographic information to help them make a better decision. There are also fraud detection resources that can be used to determine if the consumer that is applying for credit is who they say they are.

Consumer Information - This area contains information that identifies the consumer applying for credit, name and address, previous addresses, social security number, employer, and any previous names or aliases.
Report Summary - Optional but frequently used section that provides a summary of the entire report. Information contained in the summary includes, total balances, available credit being used, total credit available, total monthly debt commitment, and inquiries, etc.
Score Summary - Shows the credit risk score for the entire credit report.
Public Records - Information that is public record consisting of, civil actions, bankruptcies, liens or judgments against you.
Trade-lines - This is the heart of the credit report. It contains information on your open and closed lines of credit. If a trade-line had delinquencies it will remain on your file for 7 years. If it was closed without any delinquencies it will remain on your file for 10 years.
Each trade-line listed will contain information showing when the account was opened, if and when it was closed, outstanding balances, original balance, payment amount, whether it was an individual or joint account and a history of delinquencies associated with the account.
Inquiries - This section details all inquiries initiated by you as a consumer. It will include any inquiries made on your behalf. If you applied for credit somewhere and that establishment submitted your request to several lenders, each lender will show as an individual inquiry. Lenders use this section to see if you have been actively attempting to acquire credit.

What do lenders look for?

Your credit score is a critical factor lenders will use to determine whether to approve or deny your application. It will also be a huge factor in determining on what terms credit may be offered to you.

Lenders should also consider other information when making their decision. They will often look at other information contained in your file.

How many open accounts do you have?
What percentage of available credit are you using?
Do you have a variety of different accounts, such as credit cards, mortgage, auto loans, etc.?
What is the age of your credit file? How long have you been using credit?
What history do you have doing business with other lenders?

All of this information is available to the lender by looking at your file. Lenders will usually use this information along with your score to get an overall picture of your credit-worthiness when making lending decisions.

How to help yourself!

By understanding your credit report and your lenders requirements you can help yourself as a consumer when applying for credit. Make sure to review your file on a regular basis and keep it clear of inaccurate information. The FACT Act allows for you to obtain a copy of your free annual credit report.

Be certain that the lender has a clear picture of your situation. Two consumers with the same score may be treated differently based on the information contained in their credit report. For example, if you have a credit score of 590 and your report shows a bankruptcy or other derogatory information that can have a huge effect on your score you may be treated differently than someone with same score but without the bankruptcy.

If there is derogatory information in your file, be sure to explain the circumstances to the lender. While many lenders have developed complicated tools to help them make lending decisions, determine loan amounts and interest rates, they will also consider your individual situation. Many times if you are upfront with the lender and have offered a reasonable explanation as to why you have experienced financial difficulty, it will reflect favorably in the lenders final decision.