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How To Read A Credit Report

You've probably heard either on the news, TV, radio, magazines or the Internet that it's a good idea to get copies of and read your three credit reports. By law you are allowed a free credit report from each of the three credit report agencies -Equifax, Experian and TransUnion.

Perhaps you've also heard that reading a credit report is daunting and time-consuming. Or, you've tried to read a sample credit report and find it confusing. A few tips will make the process much more easy and streamlined. Usually, a credit report includes the following key areas:

1) Your payment history

2) How much you owe

3) Length of your credit history

4) New credit

5) Other areas -
  • previous addresses and some personal information (variations are common and typically of no consequence)
  • public records - i.e., judgments and liens
  • inquiries

For the most part, the credit-related information on your credit report is an analysis of your three credit scores. Reading your Experian credit report may be slightly different from reading either your TransUnion or Equifax report. However, breaking down the five main areas of these reports and how much weight each section carries will help you zero on what's most important. Let's start with larger percentages of your score and end with the smaller.

1) Your payment history - This commands the highest percentage (approximately 35%) of your FICO score. It examines such things as whether you have any bankruptcies, incurred late payments, or paid your bills on time. Paying on time is significant and helps your score.

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2) How much do you owe - This is the second most important area to check and amounts to nearly 30% of your FICO score. Affecting your score are things like the number of accounts with balances you have, the amounts on all your accounts that you owe, and it assesses what credit is available to you that you are using. In other words, the closer you come to owing your credit limit the lower your score will be.

3) Length of your credit history - This part of your credit score accounts for about 15%. It makes sense and it's true that the longer your credit history is the better your score should be. Nevertheless, even a short yet responsible credit history can garner you a high score.

4) New credit - FICO considers this around 10% of your score. Applying for and/or opening new credit accounts will show up on your credit score radar but will be considered with your entire credit history. So, it is best when looking for loans to do this within a 30 day period rather than over the course of many months as this will help maintain your FICO score.

5) Other areas - This makes up roughly 10% of your score. People with longer credit histories can actually add a bit to their score with this tip. For example, it's smart to have a combination of credit types on your credit report - credit cards, installment loans such as a mortgage or auto loan, and personal lines of credit. This practice is considered quite normal.

Reading all three of your credit reports may be some of the most significant reading you will ever do because monitoring these reports and using to help maintain the accuracy of your credit scores can affect everything from getting a new credit card, being able to buy a home or even getting a good job!

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