Whether you are new to the idea of credit and want to start thinking about building your credit score, or if you’ve had credit for years, it helps to understand how credit reporting works and how you can use it to benefit your finances.
Let's start with your credit report. A credit report is a snapshot of your personal credit history. It includes information about your loans, credit cards, payment history as well as if you’ve ever declared yourself bankrupt.
Companies use the information within your credit report to make decisions about whether you qualify for their products and services, so if you are applying for a credit card, taking a loan on a car, or seeking to rent an apartment, more often than not, your credit report will be taken into consideration to determine whether you qualify for approval.
There will be many areas in your life where your credit report matters, so understanding its importance and managing it well will ensure that you can access a range of financial options when you need them.
Your credit report will also provide you with a breakdown of the factors that make up your credit score. Your credit score is a number typically between 300 and 850 which represents how likely you are to pay back a loan on time based on your credit history. The higher your credit score, the more attractive you are to prospective lenders and the easier it will be to borrow at cheaper rates.
Your credit score is based on 5 main factors:
Making on-time payments – being consistent with your payments and making payments on time.
Credit utilization – the amount of credit used compared to the total of your credit limits. Experts say that ideally you want to keep your utilization rate at or below 30% of the total amount of credit you have access to.
Credit history – the longer the length of time that you’ve held your credit products indicates your ability to manage it for the long term.
Diversification of credit products – having a good mix of revolving credit (like credit cards), instalment credit (like a car loan or a mortgage) and utility credit (like utility bills)
Credit enquiries – Each time a credit report is pulled it can cause your credit score to decrease
Keeping on top of payments helps to improve your credit score but failing to pay could lead to you facing collections for unpaid bills.
Staying in control
Monitoring your credit score monthly and reviewing your credit report at least once a year is a great step to help you keep your financial status healthy. Additionally with this information, you can ensure that the financial data about you on public record is accurate.
An easy way to access your credit score is through your bank account or your credit card company. Many of these providers offer you the possibility to sign up to a free credit check service which will report your credit score on a monthly basis. You will be able to track whether your score is increasing, or decreasing, as well as where you are tracking compared to the national average. With this free monthly service, you can gain more control balancing your monthly expenses and needs against the progress of your credit score.
The main credit bureaus are Experian, Equifax and additionally in the U.S., TransUnion. They each collect information about your credit activity from public records as well as the companies that you are a client of. All of these providers allow you to download your credit report for free once per year and we recommend that you request your report from each one because the information each bureau holds about you may differ. You can also access a summarized version of your credit report on a regular basis for free from each of these providers by signing up to their free service online. Receiving the detailed version on a regular basis will be at a fee, so at a minimum take advantage of the free report at least once a year and consider subscribing as a next step.
Once you have your reports it is important to check the information such as:
your personal information - is your name spelled correctly? Is your address up to date?
are you accurately listed on the voter register? (Voter registration benefits your score in countries such as the UK)
are all the credit products that they have against your name correct – is there a risk that someone is taking out credit in your name?
are they reporting any of your accounts and balances inaccurately, or incorrectly claiming that you have late payments?
With these links to the main credit bureaus, you can request your credit reports, sign up to their free or paid-for services, and make contact if any information they have on your record is incorrect.
Building wealth not only involves acquiring value in your assets over time, but also ensuring that you are on top of your administration. Use your credit information to access the best financial services available and protect what you've already built towards growing your assets.
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