What Is a Credit Report, Anyway?
In its most basic sense, your credit report is your financial life history of bor¬rowing money. This information is gathered, managed, maintained, and shared by a credit-reporting bureau or agency.
Every day, businesses rely on the information in your credit report to help them decide whether to lend you money and at what price (otherwise known as the interest rate and loan terms). But because the information in your credit report can be sliced and diced many ways, your report becomes an important tool that serves different purposes for different people:
1.For a lender, your credit report is a tool to determine how likely you are to repay the loan, and it's an indicator of how much interest and what fees to charge you based on the risk profile you represent.
2.For an insurance company, your credit report is a tool to predict how likely you are to have an accident or file a claim.
3.For an employer, your credit report is a tool to predict whether you'll be a trustworthy employee.
4.For a landlord, your credit report is a tool to determine whether you're likely to pay the rent on time.
5.For you, your credit report is a tool to help you understand how you've handled your finances in the past and how you're likely to handle them in the future.
A picture is worth a thousand words: What your credit report says about you
As a snapshot of your financial life, your credit report may also indirectly predict your potential behaviors in other areas of your life. The fact that you have a history of making credit-card payments late may tell a prospective landlord that you're likely to be late with your rent, too. A history of defaulted loans may suggest to a potential boss that you aren't someone who follows through with commitments. If you've declared bankruptcy because your finances are out of control, perhaps you're out of control in other ways, too.
This snapshot, which brings into focus the details of your spending and bor¬rowing, and even suggests your personal life patterns, also paints a bigger picture of two important factors — characteristics that are critical to employers, landlords, lenders, and others. I cover these two critical characteristics in the following sections.
Do you do what you promise?
Your credit history is an indicator of whether you're someone who follows through with commitments — a characteristic important to most people, whether they're looking for a reliable worker, a responsible nanny, a dependable renter, or a faithful mate. Needless to say, a person or company considering lending you a sizeable sum of money will want to know the same.
Based in large part on your history of following through with your financial promises, you'll be assigned a credit score. People with higher scores gener-ally get the best terms, including lower interest rates and reduced minimum down payments. People with low credit scores can usually get credit in today's economy, but they pay higher interest rates and possibly additional fees or insurance.
Do you do it on time?
When it comes to your credit score, following through with your promises is only half of the game. The other half is doing it on time. It's a fact in the lend-ing business that the more overdue the payment, the more likely it will not be paid at all — or paid in full. This is why, as you get further behind in your payments, lenders become more anxious about collecting the amount you owe. In fact, if you're sufficiently delinquent, the lender may want you to pay back the entire amount at once rather than as originally scheduled. (When it comes to money, your creditors' faith in you is only 30 to 90 days long.) So, the longer you take to do what you promised, the more it costs you and the more damage you do to your credit score.