Parts of a Credit Report: And how you can improve yours

Your credit report. One of the many items that can make you both happy and sad for being an adult. 

It is difficult for someone to go through life without credit. Not impossible, but difficult for sure. 

For all of us who are laden with student loans (ahem, me), have credit cards (even if we pay them off every month), have a mortgage, have a car loan, or any other type of debt product, we have a credit score. 

The question is: Do I have a good one? And if not, how do I improve my credit score?

First let me preface what I am getting ready to talk about by saying that I think it should be the goal to eventually have a 0 credit score. (News flash: A 0 credit score is a good thing!) This means that you have no debt products at all. No collection accounts, no car payments, no student loans, no boat payments, no credit cards, and not even a mortgage. 

Having a 0 credit score might seem counterintuitive but it in fact makes a lot of sense. By having no credit score, you own your car(s) and home outright, you do not have a credit card, you do not have student loans, and you also have no collection accounts. In place of all these payments, you have paid off assets and cash in the bank. And when (not if) you have an emergency, you have the cash to pay for it.

Proponents of living life without a credit score and never using credit are led by personal financial expert Dave Ramsey. Living life without a credit score and paying cash for everything that you purchase is difficult. However, with careful work, planning, and discipline, it can be done. 

Undoubtedly it can take a long time to get to this point, but when you get there, it is great! You can sleep at night because you have no payments and if you have an emergency or you need a new car you have the cash to pay for one outright. 

But I digress. The argument for a 0 credit score is for a different day. 

Most people will never have a 0 credit score so we must learn how to play the credit score “game”.

So let me show you how the credit “game” is played.

There are three credit reporting bureaus:

1. TransUnion
2. Experian
3. Equifax

Any creditor that you have (someone that you owe debt to) will report to any one, two, or all three of these bureaus at least every few months. They will tell the bureaus (1) if you pay your bill on time, (2) how much you owe, and (3) your interest rate. Once you pay the bill off, they will report that as well.

Then based on the information that your creditors report to the bureaus, they will give you a credit score. All credit scores (excluding a 0 credit score) range from 300-850. Here is the breakdown of credit scores:

• 300-579: Very poor
• 580-669: Fair
• 670-739: Good
• 740-799: Very Good
• 800-850: Exceptional

Typically when applying for a loan, if you have a 700 credit score you will be qualified for close to the lowest interest rate and best terms. So if you have a 720, don’t be upset because you really want a 850, you’re still in really good shape. 

This leads me into my next point. The reason that you want a good credit score is that if you have to borrow money (you should always try to pay cash first and not borrow money) you look more desirable to lenders.

Someone with a 750 credit score is a much more desirable risk for a bank to take than someone with a 500 credit score. Someone with a 500 credit score probably has debt that has defaulted and is in collections, they have probably missed payments, maybe had a repossessed vehicle, etc. Someone with a 750 credit score has probably not had any of those things happen (at least not in a very long time). 

So here is the main reason that you clicked on this article:

Here are the different parts of a credit score, their weights, and how you can improve them to make sure that your credit score goes up and you can borrow money at a low interest rate (if you can’t pay cash for it).

1. Payment history (35%)
2. Amounts owed (30%)
3. Length of credit history (15%)
4. Credit mix (10%)
5. New credit (10%)

Let’s dive into each one and I’ll explain what they are and how you can improve each one so that you can increase your credit score.

(1)

Payment History (35%)

This is the most important part of your credit report making up the largest weight of your credit score. Each month that a debt payment is due, it is reported to at least one of the credit bureaus. The creditor (the bank, student loan company, etc.) tells the bureau(s):

1. If you paid
2. How much you paid
3. If you were late
4. Your outstanding balance

On your credit report, it looks something like this:

Payment History

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

2021

OK

OK

OK

2020

OK

OK

OK

OK

OK

OK

OK

OK

OK

OK

OK

OK

2019

OK

OK

OK

OK

30

OK

OK

OK

30

OK

OK

OK

2018

OK

OK

OK

OK

OK

OK

OK

OK

OK

OK

OK

OK

2017

OK

OK

OK

OK

OK

30

60

60

90

30

OK

OK

Paid on time: OK

30 days late: 30

60 days late: 60

90 days late: 90

You want to make sure that you minimize any time that you are late on a payment. Being 30 days late hurts but is not the end of the world. Being 60 days late is bad. And being 90 days late is really bad. 

If you want to improve your credit score (or keep it high) make sure to never be late on your payments. If you are late, it will take 7 years for that late payment to fall off of your credit report. Ouch.

Here is a tip that most people don’t know: Even if you are late on your payments, it won’t show up on your credit report until you are at least 30 days late. 

So for example, if you have a car payment that is due on the 5th of each month and you don’t pay it until the 22nd, you might get charged a late fee from your bank for being late, but it won’t show up on your credit report until it reaches the 5th of the following month.

If you already have late payments on your credit file, it’s okay. Just don’t have any more. We all make mistakes, and sometimes life just throws us curve balls and we have to take hits. Just get back up, dust yourself on and keep adulting. The longer you pay your bills on time and the less and less adverse effect a late payment will have on your credit score.

(2)

Amounts Owed (30%)

The Amounts Owed section of your credit report is an extremely important part of your credit file. This section and your payment history make up nearly ⅔ of your entire credit score, so please don’t skip this section!

This section encompasses a few different areas of your overall credit profile:

1. Credit card utilization rate
2. Collection accounts
3. Repossessions
4. Foreclosures and short sales
5. Overall credit amounts owed

Let’s tackle each one individually:

(1) Credit Card Utilization Rate:

A credit card utilization rate is simply the amount of your credit cards that you are using. This requires a little 6th grade math to figure. So channel your adolescent self to figure it out. Let’s look at an example.

If you have 4 credit cards that have a maximum of $1,000 on each one ($4,000 total) Let’s say that you owe a total of $1,500 on the cards (by any combination of the four cards). Your utilization rate is calculated like this: 

Total amount owed / Total amount available = Credit Card Utilization Rate

$1,500 / $4,000 = .375 = 37.5%

This means that the person is using 37.5% of their total available credit card balance. You should always pay your credit cards off all the way every month because. This is the way to properly and maturely manage your credit cards. But if you don’t or can’t do this, ALWAYS keep your credit card utilization rate below 10% to maximize your credit score. 

If you are currently over the 10% threshold, that’s okay. Just make a plan to pay them down (and hopefully off).

(2) Collection accounts:

This is the debts that have gone unpaid and have been sent to collections. These are the people who will call you relentlessly (and always at the most inconvenient times) to get you to pay your debt. The most common culprit for these are hospital bills. However, collection accounts can be for any kind of debt that has not been paid.

If you have collection accounts, get rid of them ASAP. They are kicking your credit score in the nuts every month. Call them (or answer their calls) and try to settle with them for less than what you owe if you don’t have the money. But if you have the money and owe the money, just pay them off. You will feel much better later and your credit score will too.

(3) Repossessions

Repossessions are when you have a vehicle that you have fallen so far behind on (usually 90+ days) that the bank has taken back. Often this vehicle will be sold at an auction for far less than you owed on it and you will be responsible for the difference. The difference will be a collection account on your credit file. 

If this has happened to you, I’m sorry. That sucks. But the only way to get it off of your credit report (other than filing bankruptcy), is to pay it off.

(4) Foreclosures and Short Sales

If you have lost your home, you know exactly what this is. This is painful. Not only to your credit file but to your emotional health as well. A foreclosure or short sale is not fun. You can try to work with the collection company who is in charge of your foreclosure or short sale to work something out, but you might just have to let this one work itself off of your credit report in 7 years.

(5) Overall Credit Amounts Owed

This is a little more abstract. The overall credit amounts owed will take into consideration everything talked about so far in this section and look at them as a whole rather than individually. There is a specific algorithm that each credit bureau uses to assess this. 

(3)

Length of Credit History (15%)

The amount of time that you have credit affects your credit score as well. Albeit, to a much lesser extent than your payment history and amounts owed.

To find your credit length simply take all of your credit lines and find out how long you have been paying on each one of them. Then find the average amount of time for your entire credit file. Typically lenders want to see at least 2 years of credit history. If you have less than that, it is typically referred to as a “thin credit file”. If you have a thin credit file, you can still probably get a credit card or loan, but it might not be at a great interest rate. 

Here’s how it works:

Line	Age (Months)
Credit Card #1	66
Credit Card #2	82
Car Loan	33
Student Loan	18
Student Loan	24
Student Loan	29
Student Loan	35
Mortgage	44
Average	41.375

In this example, the average credit age is about 3 years and 5 months. Not bad. Typically, to maximize your credit score, you need at least a 7-year average age. 

This takes time. That is the only way to improve it. If you are 22 years old, you won’t have a long history, but if you are 56 years old, you probably will. 

Also, if you have a low average credit age, don’t fret. It will improve over time. Just know that if you pay something off that you have had for a really long time, your average age will go down. This will also probably pull your credit score down a little.

But this is only 15% of your overall score, so don’t worry about your credit score going down very much (if at all) when you pay off a debt. Just celebrate that you paid off a debt!

(4)

Credit Mix (10%)

Your credit mix will make a difference on your credit score, but not that much. 

A credit mix is the different types of credit that you have. This can include a mortgage, credit cards, student loans, personal loans, car loans, boat loans, etc. If you have several different types of debt products, you can maximize your score (as long as you follow the guidelines that I have outlined thus far. 

A word of caution: If you don’t have very many types of credit (maybe you only have one credit card and several student loans) don’t go out of your way to get other types of debt just to improve your credit score. Paying the interest and taking on the financial risk is not worth it. If you are going to take out that loan because you need a car or want a mortgage, fine. But don’t do it JUST to improve your credit score. It won’t make that big of a difference and isn’t worth the risk.

(5)

New Credit (10%)

In my opinion, this one is really stupid. 

When you have your credit pulled for a credit application your credit score will go down. 

Yeah. You read that right.

If you want to actually get a new credit card, student loan, mortgage, car loan, etc. your credit score will go down. It’s not very much but it will go down.

To combat this, you can pull your credit report once per year for free and it will not affect your credit score at this site. You can also use one of the free credit reporting apps like Credit Karma. With Credit Karma, you won’t get an official (also known as a hard pull) credit report, but it will give you a pretty good idea of what is on your credit report.

If you decide to apply for a debt product, do so sparingly. In my experience working in finance and banking, you will typically see a 5-15 point drop for about 60 days on your score if you pull your credit no more than once per year. 

Also, if you need to pull your credit report because you are shopping for the best interest rate (like you should do with a mortgage) you can have your credit pulled for about 30 days by multiple lenders and it will only hit your credit report as one total pull. #lifehack

As I said before, if you can get to a point where you don’t need credit because you have a lot of money in the bank and you have paid off all of your debts, do it. But for most of you who aren’t there and/or won’t be at that point for a long time these are the ways in which you can properly and maturely manage your credit profile. 

Welcome to adulthood. It sucks.

If you want to know any more about your credit report, how it works, and how to maximize your score, check out my other articles here.

Hopefully you have a little more information to become more fiscally fit. Until next time!