When Diners Club first launched their charge-card in 1949, no one would have believed what the knock-on effect would be. US citizens spend more than $2 trillion annually on credit cards more than they spend in cash. Creditworthiness has become an issue for everyone.

Most people know that creditworthiness is tracked using a credit report; however few understand how the scoring works. Scores range from 300 points: highest risk, to 850 points: lowest risk, on FICO.

The FICO system was developed by Fair Isaac & Co, and used to evaluate the probability that customers will meet payment on their bills. This score is used in the US by Equifax and is the deciding factor for over 75% of applications for credit. Bear in mind that in 2003, practically 50% of Americans had FICO scores between 700 and 800.

The mathematical determination for FICO scores uses five factors: current debts, previous credit performance, credit tenure: how long you have had credit, the kinds of credit to be had and the pursuit of new credit.

What appears on The Report and Why Should it Matter?

When looking in depth at an Equifax report, it is split into seven sections. These provide an overview from the major credit reporting bureaus.

The first section encompasses personal information like present and previous addresses, employment history and social security number. This information is crucial for identity thieves, so be sure to protect it. Confirm it is correct then shred it before discarding.

The second part contains an abridged account of your credit history, including the type and number of accounts, both existing and closed, and whether these accounts are in good standing. It also gives details of all your credit inquiries for the past year.

It might appear as though the more accounts you have, the better your credit score, this is not necessarily the case, more is not always better.

Financial institutions generally assume you will use all your available credit and factor the payments that would be needed to service the debt. You might have a dozen cards with zero balances and have no problem meeting a $2 000 monthly mortgage payment, however if the bank calculates the ability of you to make payments on these cards, your creditworthiness is lessened.

The third section of the report provides comprehensive account data, including the name, opening date, balance, type, number, and status of every account you have. An analysis of every account entails date of last activity, payment history and contact information. If you see discrepancies in this information, you must challenge it. According to federal law, the credit agency has 30 days to respond to your query. If your dispute is successful, the incorrect information will be removed from the report.

The fourth part of the report contains inquiries regarding your credit history. inquiries are referred to as “hard” or “soft”. Hard inquiries are produced when you give authority to companies to access your credit report.

These are carefully tracked, if a large amount of them appear in any one-year period, it will have a negative affect on your FICO score. Soft inquiries are produced when current creditors verify your credit status, if card issuers re-evaluate your file without being asked to and also when you check your credit. Soft inquiries do not influence your credit report.

The fifth part of the report contains details about accounts that have been handed over to credit agencies and the sixth provides data about liens, wage garnishees or judgments against you in all court records.

The final part of the report outlines how to you can dispute information provided by your credit report. Regardless of claims on infomercials, there is little that can be done about delinquent accounts.

The Federal Trade Commission says this information remains on your credit report for a seven year period, bankruptcy ten years and lawsuit-related data, until the suit is settled. No one needs these problems so ensure payments are made in time and tackle credit issues without delay.

How Credit Report Information Impacts on Your Score

Equifax refer to missed or late payments, length of credit tenure as well as the account balance relative to credit limits as the major factors influencing your FICO score. You may have a good income and pay your cards in full every month, but large balances may affect your score negatively.

Additionally, if you don’t have a mortgage, car repayments or current revolving debt it is highly unlikely that your FICO score will be as high as 850.

How to Check Your Credit Score

Credit score reports are available online instantly for less than $50. When contemplating an important purchase like property, process a credit check at least ninety days prior to your anticipated purchase. This will allow ample time to deal with discrepancies appearing on the report.

Equifax, Experian and Trans Union are the three major credit bureaus used in the US. They are independent operations, so you should request for a credit report from each one to obtain a complete illustration of your credit history.

In Conclusion

Prevention is the best possible cure despite advertisements that guarantee to repair bad credit. If credit information is accurate, there is very little that can be done to remove negative information from your report, you will have to wait 7-10 years. So prevent harmful information from appearing on your credit report in the first place. This will ensure your ability to obtain future finance.