What is a credit report and three ways it can ruin your life
A good credit report can mean all the difference in getting that money you need but that's not the only way it affects your life.
In fact, there are three other ways your credit could be holding you back.
By the end of this video, you’ll know exactly what is and isn’t on your credit report and how it determines your FICO score. I’ll also show you the factors you can use to manipulate to boost your credit score to get the money you need at rates you can afford.
Today’s video is the sixth in our debt payoff series, an entire series on ditching your debt from creating those goals that are going to motivate you to some tricks I’ve learned to pay off debt.
Think of it like a TV series, at the end of this season, you will have all the tools you need to finally get out from under that crushing debt.
At this point in the series, we’ve created the goals that are going to help you keep your debt free plan and the ways to pay off your debt. That’s where a lot of money experts stop. They tell you to cut up your cards and never use debt again.
What Most Money Experts Miss about Credit
The problem is that you never know when an emergency is going to come up and you’re going to need a loan or when you’re going to want to buy a house. I have to laugh when these money gurus say to save up and only pay cash for a house.
Not a problem when you’re making a couple hundred grand a year but someone able to only save five grand a year, it would take them more than 40 years to save up for a house. I don’t know, maybe you could buy a retirement home.
That’s why managing your credit score and understanding credit reports is so important even if you want to be debt free, but it goes way beyond getting a loan. Your credit report is used in rental applications, job applications and it can even increase your insurance premiums.
So over these next few videos in the series, I’ll reveal everything you need to know about credit from understanding your credit report to fixing your score and even freezing your report to protect yourself from hackers.
What is a Credit Report?
This first one is a massive video, everything you ever wanted to ask about your credit report and FICO score.
We’ll look first at what is a credit report and some of the biggest credit myths people have. Then we’ll see how your credit is used in your FICO and what is a good credit score.
Your credit report is just the history of all your loans and other financial history including closed accounts for up to 10 years. All payments you’ve made on loans, the balance and credit limit, it’s all on there. It’s this history of your credit that new lenders use to approve a loan and to calculate your interest rate.
Now we always talk about A credit report but you actually have three different reports. Three credit bureaus; TransUnion, Experian and Equifax, all collect information from lenders to make a credit report. When you apply for a loan, lenders will decide which of the three reports they want to use and they’ll share your payment information with one or all of the bureaus.
It’s big business for these three companies but it also makes managing your credit report and score a pain because you have to manage all three reports.
Credit Report Myths and Misconceptions
One of the biggest myths in credit is what’s exactly on your report and what isn’t. It’s important to get the facts because it’s going to put the power in your hands when you go to get a loan.
Not only is your history of on-time and missed payments on your report but some other things might surprise you. Your current and past address is on your report as well as credit card balances and limits. Also on your report though is any court judgements, liens, evictions and any delinquencies on child support, utilities and cell phone payments.
So your report is a very personal look into your finances and that can be used against you.
But there’s also a lot of misconceptions on things that actually aren’t on your report. A lot of your personal information like race, gender, age, marital status and employment history isn’t on your report. Neither is salary or the interest rates on your loans.
A lot of people get this confused because lenders ask for the information in a loan application. They’ll ask your salary and employment history to get an idea of things like how much of your money goes to debt payments.
What Does the Average Credit Report Look Like?
The first question I get when talking about credit reports is, what’s the average report look like? Is my credit report good or bad?
So let’s look at the average report.
The average American has 17 years of credit history and four-in-ten have had their credit checked for a loan at least once in the last six months.
The average American has 12 open credit accounts, between cards and other loans, and owes over $16,000 on credit cards alone. All told, they owe more than $140,000 on all loans, cards and mortgages.
Why should you care though? Who uses your credit report and why is it important?
Yeah, lenders use it for a loan application but there are actually a lot of other ways your credit affects your life.
Something that surprises most people is that your credit report is used when you rent an apartment or even when you apply for a job. Landlords and employers can pull your credit report and use that in determining whether to rent you the place or give you a job.
Everything from insurance to cell phones can be more expensive for people with bad credit as well. The Federal Trade Commission allows cell phone companies to charge more to people with bad credit, a charge that starts at an extra $8 a month. Drivers with bad credit pay nearly double the premiums for insurance compared to others.
How is Your Credit Report Used?
So your credit report, or what’s on it, is hugely important. I’ll show you exactly how it goes into your credit score here but in future episodes in the series, we’ll look at how to get bad marks taken off your report so make sure you subscribe and check those out.
Now the biggest use of your credit report is to calculate your credit score. A company called FICO constantly watches your credit report and uses the information to assign a score between 300 to 850. There’s another company called Vantage that is also doing credit scores now but the truth is that most lenders still use the FICO score.
While lenders will look at your credit report too, the biggest factor in getting a loan and the rates you have to pay are this credit score. Listen, lenders are lazy…and honestly a lot of times not that bright so it’s easier to have rules around this credit score for approving your loan and setting the rate.
That means, once you know how your FICO score is calculated on the things in your report, you can game the system to increase your score. A lot of what we’re going to be talking about here and in other videos is how to use that to your advantage.
Five Factors in FICO Score
FICO uses five factors in determining your credit score; payment history, total amount owed, length of credit history, new credit and types of credit. Some of these are out of your control but you can manage other pieces and those are the ones we’ll be manipulating to boost your credit score and get you the best rates possible.
Payment history is the biggest part of your score but something you really can’t do much about. What’s in the past is done. We’re going to spend more time talking about the future.
Now FICO is pretty secretive on how it calculates your score but we do know how some things will hurt your credit score. For example, being more than 30 days late on your mortgage will drop your score between 70 to 90 points. Filing bankruptcy will destroy your score from 140 to 230 points.
The higher your score is, the harder it falls. That makes it so important to know these factors and manage your credit.
So we’re going to be looking at ways you can boost your score to get lower rates and get the money you need but what’s a good score? What FICO score do you need to get those low interest rates?
So instead of thinking about what’s a good score or a bad score, your first goal should be to get your credit score above that 660 FICO mark. Beyond that, you’ll really start to see your interest rates on new loans go down.
Understand though that credit scores aren’t the same for all age groups. Because a lot of those factors have something to do with your age, it’s going to be natural for younger borrowers to have a lower score. In fact, the average score for someone under the age of 30 is 630 on the FICO scale, way below the average score for people in their 60s.
That’s a lot to take in but it’s going to give you the ammunition to start boosting your score. You’re going to be able to avoid those credit score myths and use some of the hacks we’ll talk about in the next episodes to raise your score fast. In fact, next week, I’m going to show you how to get your credit report absolutely free and my favorite trick to fight hackers.