Understanding And Using Your Credit Report

Unable to understand your credit report? Here's what counts against you and what you can do to compensate in order to secure the loan or financing you want.

The best way to make sense of a credit report is to first accept that there is no sense in the credit reporting system and how creditors assess you. While you may have never been late on a payment in your life, a large credit line that hasn't even been charged on could lower your credit score. It's just another example of how unfair and bogus a credit report can be.

This is why you must understand what really counts against you, what doesn't and what's worse. While different lenders use different criteria and credit reporting systems use various scoring methods, there are a few basic rules.

First, one of the main factors on your credit report is your debt-to-income ratio. Basically the amount you owe compared to the amount you make, lenders like to see it around 30 percent. The lower the better and 45 percent is usually the cutoff for whether or not you'll get a loan or financing.

The credit score is usually on a scale of 300-800 or 400-900, the lower scores being worse. A score of 600 or better is considered fairly good. A score down in the 300 or 400 range is not good.

These scores are based on complicated equations that aren't really worth trying to understand. Unfortunately, you're stuck with the score you've got until you do things to improve your credit rating""pay down debt, catch up payments, etc.

While you may pay your utility and other regular bills on time, a credit report does not take that into account. Rent or mortgage is most important, but after that, it is the items that may be lower on your priority list that are considered: credit cards, department store credit, other loans and debts. This is one reason it's so important to stay current with creditors. And don't figure that a late payment might as well be more late, since the creditors report different degrees of delinquency.

While your history with credit card companies is most important, the credit limit is also a factor. Accounts with big credit lines are considered potential debt, so even if you haven't used that $5,000-limit account at all, it could count against you.

If you've never had credit, this can count against you as well. The supposed reason is that you haven't proven that you will make regular payments to a lender or creditor. The fact may be that you're smart enough to have stayed out of credit debt. However, you need to establish a credit history. This is best achieved by getting a department store or credit card. Use it and pay a little on it. You'll find once you have a credit card, offers will come pouring in. Don't go crazy. You don't want to turn no credit into bad credit. Just keep current and you'll eventually establish that history that's so important with lenders.

Applications for credit also drive your credit score down. It doesn't make much sense that simply looking at your credit will harm it, but that's the sad fact. It does not have a major impact on your credit rating, just understand that the more companies or creditors look at your credit, the more it counts against you.

While credit reporting and scoring may seem unfair, a lot of people don't know that they can have a say when trying to secure a loan. Many lenders will accept a letter explaining some of your debt, late payments or a particular situation. If you can say, for instance, that you have not missed payments in the last two years, it may balance a history of delinquent payments or closed accounts several years ago. Just be sure not to shrug off the responsibility for the debts or delinquency in the letter. Simply tell them why you're not as much of a credit risk as might be reflected on your credit report.

One last thing to remember is that medical debts, for whatever reason, do not usually count against you when it comes to credit reporting. Again, creditors are most concerned about your history paying back other loans and credit accounts.

While there's no way to instantly improve your credit, you can do things to improve your credit situation.

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