Lenders use a credit report and income to determine if they can offer credit to consumers. It’s important to review your credit report annually to verify accuracy and to give yourself a chance to correct any errors that may exist. The law allows you one free credit report per year from each major credit bureau. Making sure you review your credit report annually and correct any discrepancies will help keep your credit score high.
The next time you review your credit report, here are some key things to look for:
1. Late Payments
Delinquent payments have a big influence on your credit score. If a bill has been paid 30, 60, 90 or 120 days late, it can be very damaging to your score and can reduce your chances of getting a loan. The later the payment, the bigger the impact to your score.
Timing and frequency are also decisive factors. A recent late payment on your report can be more damaging than a late payment from four years ago. Similarly, multiple late payments are more damaging than a single late payment.
2. Debt-to-Credit Limit Ratios
Credit scoring models consider your debt-to-credit limit ratio, or utilization of available credit. The ratio compares your available credit with your existing balance. The lower your ratio, the better it is for your credit score. Generally it’s best to keep a debt-to-credit ratio under 50% to maximize your score – for example, if you have a $5,000 limit on a credit card, try and keep your balance under $2,500. The credit bureaus want to see that you have available credit, but don’t necessarily need to use it.
Accounts that have gone to collection or have been written off as bad debt can stay on your credit report for seven years. Lenders will be very reluctant to offer credit to someone who has unpaid collection accounts or charge offs. Consumers are typically aware when they have these situations on their credit report; however it is easy for an unpaid hospital or utility bill to be on a credit report and not know about it.
It’s also a possibility for a collection to be present on a debt that is not yours. In that situation, you can dispute the item with the credit bureau and have it removed from your report.
4. Judgments, Liens, Bankruptcies
You’ll find these indicators in the public records section of your credit report. These can have a large impact on your credit score. Reviewing this section is a good way to verify that you have addressed any issues and that your report is accurate. The more time elapsed since a judgment, lien, or bankruptcy, the better it is for your score.
It’s important to know who has been viewing your credit report, along with the frequency. There are two kinds of inquiries:
- Hard inquiries – A request for credit. Typically, this is triggered by a loan application, signed paperwork, or permission given to a lender to check your credit history. Hard inquires may slightly reduce your score for one year, but they’ll remain on your credit report for two years.
- Soft inquiries – A passive review of your credit file. If you pull your own credit report, that’s a soft inquiry. Prospective lenders often create soft inquiries for marketing purposes. Soft inquiries don’t affect your score.
Knowing what to look for and how to address discrepancies in your credit report can help maximize your score. By improving or maintaining your credit score, you may qualify for more favorable loan rates and terms which could add up to significant savings.