So often we get hung up on our credit scores. But your credit score isn’t the only thing you need to be aware of or even the most important thing. In fact, your credit score is really just a grade that’s derived from the one document that really underlies the whole system, which is your credit report.
Those in the know realize that the information on your credit report is what results in your credit score being high or low.
Below I’ll explain how the credit report works and how you can improve the information on your credit report in order to improve your credit score.
Information in Your Credit Report is Categorized
All of your credit-related decisions and actions are recorded in your credit report. Your credit report, like your scores, is compiled by the 3 major credit bureaus: Experian, Equifax, and TransUnion. Each bureau could have slightly different information on your report (which is why it’s important to check for errors) but in general the reports from each bureau should be the same. So what’s on the reports? Things like who you owe, when you make payments, and how much money you owe are all recorded in your credit report.
This information is accessed by a credit scoring model and categorized. The widely-used FICO credit scoring model includes the following categories:
Length of Credit History
Types of Accounts
All of the information in your credit report is assigned to one of these categories. If you miss a mortgage payment, that is reflected in your payment history. The dates you opened your credit accounts, and whether or not they are still active, are also part of the length of your credit history. There is a way for all of the information in your credit report to be labeled.
Realize that even though FICO is considered the “standard” in credit scoring, there are other models. The VantageScore model uses different categories, including payment history, utilization, balances, depth of credit, recent credit, and available credit. There are other scoring models — and even different versions of the FICO score — that emphasize different categories.
In the end, though, the first step is categorizing all of the information contained in your credit report.
Weighting Your Information and Plugging It In
Once all of your information is categorized, it is given a weight and plugged into a proprietary algorithm. Each scoring model weights the different categories differently. FICO claims to weight its categories as follows:
Payment History (35%)
Credit Utilization (30%)
Length of Credit History (15%)
Types of Accounts (10%)
Credit Inquiries (10%)
Other scoring models also tend to give a heavy weight to payment history, since it offers insight into whether or not you have a habit of missing payments, or paying late.
Understand, too, that these are just broad weightings. Even FICO has different shades to its weighting. A missed payment for a mortgage is likely to weigh heavier in the payment history category than a missed payment for a credit card, just because the mortgage represents a heavier responsibility. Likewise, even in the broader categories, in types of accounts, a payday loan is considered negatively as opposed to a student loan, and the subtle weighting in the algorithm reflects that.
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Your Credit Score is the Outcome
This is a rather basic explanation, and probably simplified more than the actual process, but in the end, the result is your credit score. All of the information in your credit report, after being categorized, assigned a value, weighted, and plugged into a mathematical model, spits out your credit score. The fact that different models are used by various credit reporting agencies and lenders, and even tweaks of common models like FICO are offered, accounts for the disparity in credit scores coming from different sources.
The type of information plugged in, and how it is categorized and weighted, makes a difference. However, in the end, it’s all based on the information in your credit report.
Fix Your Credit Report to Improve Your Credit Score
Rather than focusing on your credit score, consider focusing on your credit report. Look at problem areas, and concentrate on fixing those. Improve your payment history if that is holding you back. Is your credit utilization too high? Pay down your debt. If you fix errors on your credit report and improve your credit behaviors using your credit report as a guide, your credit score will take care of itself.
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