Credit Yogi


How Do I Read And Understand My Credit Report

Read and Understand Credit Report

All credit reports are broken down into several sections. These include personal information, employer history, personal statement, account information, public records, and credit inquiries. Consumers should educate themselves to be able to understand the information found in their credit report before attempting to obtain one.

Before applying for credit of any kind, it helps to understand the impact of poor credit on your score. Lower scores mean higher interest rates that cost you more money. Here are two examples that show the difference.

Are you interested in buying a car? Here’s how your score impacts your rate.

Credit ScoreAverage New Car RateAverage Used Car Rate
579 and Under14.39%20.45%
720 and Above3.65%4.29%

Mortgage rates are also based on credit score. The following table from shows how your score can affect the interest rate on your mortgage.

Credit ScoreAnnual Percentage RateMonthly Payment

Data courtesy of July 27, 2020

Identifying Good and Bad Items on Your Credit Report

Your credit report contains many different entries. To fully understand your credit report and score as you review it, you need know how to identify both positive and negative items. Even if you have no negative marks, certain items can negatively affect your score, while some will only do so temporarily.

The type and age of negative marks affect your score differently. Some of the negative marks to watch for include:

  • Charge offs
  • Bankruptcy
  • Foreclosure
  • Repossession
  • Late payments
  • Collection accounts
  • Evictions

Negative Items and Their Effect on Your Credit Score

The best way to maintain a good credit score is to make payments on time and ensure you spend responsibly. Negative items will decrease your credit score and cause lenders to see you as a financial risk. Generally, lenders can view negative items on your credit report for seven years, although some remain for ten. The timeline for negative items on your credit report is:
  • Late or missed payments—up to seven years after first report.
  • Collections—these are delinquent accounts that are sent to collection agencies. They will remain on your credit report for seven years and seriously impact your credit score.
Bankruptcy—filing bankruptcy can lower your credit score substantially. While Chapter 13 remains on your credit for seven years, Chapter 7 remains for 10.
Impact of negative marks on credit score

Why Your Credit Score Doesn’t Improve After Eliminating Debt

While paying off your debt sounds good, it can affect your credit score substantially. The length of time it takes to notice any improvement is contingent upon several factors. These include how quickly the creditor reports the payoff, the type of loan, and the information included on your credit report. Paying off your debt does not guarantee an immediate increase in your credit score. It may even temporarily decline. However, you should see your score begin to increase again in one or two months.

How Paying Off Revolving Credit Affects Your Credit Report

Credit cards are the most common type of revolving credit, providing access to additional funds while you are making payments.  They have no specific repayment term, but your balance has an impact on your utilization ratio (percentage of your total available credit). This ratio comprises approximately 30 percent of your FICO score. Financial experts commonly recommend maintaining a utilization ratio of no more than 30 percent of your total credit line. For example, if your total revolving credit limit is $1000, you should carry no more than a $300 balance.

The Effect of Installment Loans on Your Credit Report

Unlike revolving credit, installment loans have specific repayment periods and set payments, usually monthly. While paying off a credit card allows you access to additional funds, installment loans do not. The lender gives you a specific amount of money when the loan commences. Once you receive your loan, you have no further access to additional funds. For this reason, your credit score may decline after you pay off an installment loan. Fortunately, the decrease is temporary. Experts recommend a mix of both revolving credit and installment loans to best benefit your credit score.

How the Credit Scoring Model Works

Paying off your debts affects your credit score in several ways. The following factors determine how.

  • The highest percentage of your score (35 percent) comes from the timeliness with which you pay your bills.
  • Another 30 percent is based on your total debt, both installment loans and revolving credit.
  • The longevity of your credit file makes up another 15 percent.
  • Diversity of account types is important, but it has minimal effect on your credit score (10 percent).
  • Applying for too many new accounts in a short period can also affect your score. Making up 10 percent of your total score, too many hard inquiries cause lenders to doubt your credit stability.
Credit Scoring Model & Factors

Be Informed About the Implications of Paying Off Debt

Make sure you understand any negative repercussions to your score when paying off debt. Fortunately, decreases in your credit score are only temporary. Remember, too, that paying off an installment loan has less effect on your score than paying off revolving credit. Paying off revolving credit lowers your utilization ratio. Keep in mind there may be a temporary decrease in your credit score when you initially pay off an installment loan.

How to Determine the Factors with the Most Weight on Your Credit Score

Both positive and negative factors affect your credit score. Common factors include:

  • Payment history can have a positive or negative effect on your credit score and depends upon the way you handle your debts. Your payment history comprises 35 percent of your overall credit score, so it’s important to make all your payments on time every month. Even one late payment can impact your credit score.
  • Credit utilization comprises 30 percent of your FICO score. Experts recommend consumers use no more than 30 percent of their total available credit.
  • The length of your credit history is also a factor. The longer your history, the better you look to potential lenders. Keep credit cards active once you pay them off. Closing them affects your credit ratio by increase your utilization ratio.
  • A mix of credit is desirable, but only accounts for about 10% of your score. A good mix of credit types shows lenders you are able to handle several types of loans responsibly.
  • Whenever you apply for new credit, a hard inquiry goes into your credit report. Each time you apply for new credit, your credit score may decrease by a few points. Too many inquiries in a short time can throw up a red flag for lenders.
  • While it’s nice to pay off your debt, it looks effective to show you’re making timely payments and paying down your balances. Remember that paying off an installment loan can temporarily decrease your credit score.

What Do I Do If I Find Out I Have a Low Credit Rating?

Individuals are often unaware of their credit rating. Unfortunately, you may only find out when turned down for a credit card, loan, or mortgage. What do you do next? Investigate the reason for your low credit score. In some cases, you may not have anticipated the impact paying late or being overextended can have.

Most banks and other financial institutions consider your FICO score when determining whether you are a good credit risk. FICO scores can range from as low as 300 to as high as 850. The average score, according to a 2018 report, was 704. More than 33 percent of consumers have scores lower than 669, which is considered fair.

These factors contribute to a lower credit score:

  • Credit history—how long since you first obtained credit
  • Type of credit: revolving or installment loan
  • Amount of new credit you have acquired
  • Late or missing payments in your credit file
  • A history of maxing out your credit cards

Anyone whose credit score hovers close to 300 will have more problems than just obtaining credit. You may have difficulty renting an apartment, and employers may even hesitate to hire you. Your financial freedom is contingent upon the strength of your credit score.

Researching Your Credit File

If you do not know your credit score, or you need to monitor it closely, you can find it several places. Many credit card issuers provide your score free. Several websites approved by the three major credit bureaus provide consumers with a free credit score. Your credit score is directly related to the information in your credit report. Unless you are a victim of fraud or your file contains erroneous information, you may be surprised if your score is low.

Once you learn of your low credit score, you will want to request a copy of your credit report. You are entitled to one free copy from or call 877-322-8228. You are also entitled to one free report annually from each of the three major bureaus—TransUnion, Equifax, and Experian. Several other free sites also provide free credit reports for Transunion and Equifax. As soon as you receive your report, review it for accuracy. If you find errors, you will have to file a dispute to have the error corrected or removed.

Once you have completed the review and verified the accuracy of the information, you’ll need to think about how to improve your score. Every person’s situation is unique, and your score may be low for more than one reason. For example, any debts that went into collection will remain on your report for seven years even if you pay them off. Paying them may improve your credit score.

Steps to Take to Improve Your Credit Score

Besides correcting errors and paying off collection accounts, a few other steps can help improve your credit score.

  • Reduce the balances on your credit cards. The recommended utilization ratio is 30 percent. Higher than 30 percent can raise a red flag to potential lenders.
  • Diversify your credit accounts. This means accumulating both installment loans and revolving credit accounts.
  • Obtain a secured credit card or a credit builder loan to begin building or rebuilding your credit history.
  • Talk to your creditors to see if they will remove late payments from your credit file, as well penalties such as late fees.
  • Check your eligibility for a credit card with a zero or low-interest balance transfer. Transferring balances from high interest cards puts all the debt in one place with one payment monthly. Be careful, as there are limits to the amount you can transfer, and some cards charge an up-front fee.
  • Research a debt management plan that allows you to budget your payments, while also negotiating with creditors for a debt settlement.

While in the process of rebuilding your credit, continue to monitor your credit closely and be aware of your debt-to-income ratio. You might try an online budget app to track your credit score, stay within your budget, and identify negative spending patterns that lower your credit score.

Reasonable Goals for future

I’m Monitoring My Credit: Now What?

Now that you are monitoring your credit regularly, it’s time to take the next step. You’ll need to set goals for yourself. They can be anything from purchasing a new car or home or replacing an aging appliance. Perhaps you just want to improve and maintain your credit score. Set reasonable goals so that you can stay on track and achieve them.

When Should I Allow My Credit to Be Checked?

Lenders typically check your credit when applying for credit. You may even see multiple inquiries on your record if you are shopping for a mortgage or a car loan. When these inquiries are all within a short period, the reporting agency may understand they are all for the same purpose and count them as a single pull. Car dealers frequently do this to get the customer the best possible deal and the lowest interest rate.

When Should I Not Allow My Credit to be Checked?

You should be careful about authorizing anyone to pull your credit. If you are planning to buy a home, you may decide to shop for some large ticket items before you have chosen a mortgage lender. If these items require credit applications, lenders see them as a red flag. You may find you qualify for a high interest rate that makes house payments out of reach. Wait to make any credit purchase until after you are approved and have closed on your new home.

Do not allow a lender to check your credit before you have decided whether or not to apply for a loan or mortgage with them. This is extremely important if you are solicited out of the blue by an unknown lender who asks you to provide private information. If the rate they offer looks too good to be true, it could be a scam. Scammers use this method to harvest your information and use it fraudulently.

Pull Your Own Credit Report Before Applying

Pull your own credit report first before you authorize a lender to do so. You’ll be able to present a picture of your creditworthiness to a lender before applying. The lender can then give you some idea what to expect and allows you to shop around without damaging your credit score. You can then apply to the lender with the best preliminary terms and authorize the credit pull.

Online sites that provide unlimited free credit reports allow you to download and print your own credit record. You are also entitled to one free credit report per year from Take this copy with you when you first visit each lender. Remember, the lender will want to see your entire file, including your credit history. Having that information in hand also gives you an opportunity to verify the information if you have not yet done so.

Monitor your Credit Report Regularly

Remember to monitor your report regularly to be sure it contains no errors. Knowing and understanding your credit report and score are critical to planning and maintaining a secure financial future.

If you would like a free consultation from a non-profit credit counseling agency, Credit Yogi can help you. You’ll be happy you did. Our database includes over 160,000 professionals operating in every zip code in the United States. It’s 100% FREE and you never have to hire anyone. Ever.

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