In 1949, Diner's Club launched the first charge-card company. Today, Americans spend more using credit cards than they spend with cash. With more than $2 trillion worth of credit card transactions each year, the creditworthiness of card users is an increasingly important issue to creditors and consumers alike.

While most people realize that their personal creditworthiness is tracked on something called a credit report, few know much about it or their scoring system. The score, known as a FICO score, was developed by Fair Isaac & Co. to evaluate the likelihood that consumers will pay their bills. FICO scores range from a low of 300 (highest risk) points to a high of 850 points (lowest risk) and are used as the deciding factor on more than 75% of credit applications, according to Equifax, one of the three major credit bureaus in the United States.

In determining the FICO score, mathematical models are used to analyze the data on an applicant's credit report, taking into consideration five factors: previous credit performance, current level of indebtedness, time credit has been in use, types of credit available and pursuit of new credit.

What's on the Report and Why Should I Care?
An in-depth look at a credit report provided by Equifax provides a good overview of the type of information that can be obtained from any of the major credit reporting bureaus. The Equifax report is divided into seven sections:

Personal Data
The first section contains personal data, such as current and previous addresses, social security number and employment history. This is crucial data for identity thieves, so be sure to protect it by making sure this information is correct and accurate, and if you discard it, shred thoroughly.

Credit History
The second section of the Equifax report provides a summary of the applicant's credit history. It includes the number of accounts (both open and closed) held by the applicant, the type of accounts (mortgage, installment, revolving or others), the number of credit inquiries over the last 12 months, the number of accounts that are past due as well as those in good standing. Intuitively, it may seem like the more accounts you have open, the higher your credit score will be, but when it comes to credit, more is not necessarily better.

When financial institutions review your credit report prior to approving a loan, they often assume that you will use all of the available credit on your credit cards and factor-in the monthly payments that would be required to service that debt. If you have a dozen credit cards, all with zero balances, you might have no problem making a $2,000 mortgage payment each month, but the bank might look at the situation differently. If the bank factors in your ability to make monthly payments on a dozen credit cards in addition to a $2,000 mortgage, your creditworthiness may be diminished.

Account Details
The third section provides detailed account information. It includes the name, account type, account number, date opened, balance and status of every account on the applicant's record. A breakdown of each account provides payment history, date of last activity and contact information for the credit issuer. The section also includes a summary of past-due accounts and accounts with a negative credit history.

If you disagree with any of this information, you have the right to challenge errors on your credit report. Under federal law, the credit reporting agency then has 30 days to respond to your challenge. If your challenge is successful, the offending information will be removed from your report.

The fourth section addresses inquiries into the applicant's credit history. Inquiries are classified as "hard" or "soft." Hard inquiries are "generated when you authorized a company listed to request a copy of your credit report." The number of inquiries over a 12-month period is tracked and taken into account when your FICO score is calculated. An excessive number of hard inquiries have a negative impact on your score.

Soft inquiries are generated by your current creditors checking on your status, credit card issuers reviewing your file to see if they wish to extend an unsolicited offer and you personally checking your own credit. Potential lenders don't see these inquirers when they review your credit report, and these inquiries do not impact your credit report.

The fifth section details any accounts that have been turned over to a credit agency. If you failed to make payments and any of your accounts were sent to collection, information about the delinquent accounts appears here. Similarly, the sixth section of the report provides information about liens, wage garnishments or other judgments that appear against you in federal, state or county court records.

Dispute Issues
The seventh section of the report provides information on how to dispute any of the information on your credit report. When it comes to delinquent accounts and other damaging information, the only way to repair your credit is to wait. Despite the claims of those late-night infomercials, once negative information appears on your credit report, there is little you can do to clear it up if the information is truthful and accurate. The FTC says such information remains on your report for seven years, with several exceptions: Bankruptcy remains on your report for 10 years; lawsuit-related information remains until the suit is settled. To avoid these problems, make all payments on time and don't ignore any issues that arise with creditors.

How That Information Impacts Your Score
Factors such as payment history, the length of time an individual has had credit and the individual's employment history all play a role in determining your FICO score. So, even though you may have an excellent source of income and pay all of your bills on time and in-full, if you don't have a mortgage, car payments or revolving debt of any kind, it is unlikely that your FICO score will be 850.

Equifax cites late payments, or lack thereof, length of credit history and the size of account balances in relation to your credit limits as major factors that impact your FICO score. Even if you pay off the full amount owed on your credit cards each month, the size of the bill has an impact on your score, as large balances are frowned upon.

Check Your Credit
If you are contemplating a significant purchase, such as a second home or a substantial piece of property, running a credit check on yourself is a good idea. If you run the check at least 90 days prior to your purchase, you should have plenty of time to address any discrepancies that appear on the report.

While credit reports can be obtained from a variety of sources, the three major credit bureaus in the United States are Equifax, Experian and Trans Union. Credit reports can be ordered online and obtained instantly. The cost of obtaining a credit report is less than $50 per person. Keep in mind that each of these credit bureaus operates independently, so you may need to request a report from each of them to get a complete picture of your credit history.

The Bottom Line
Despite the many advertisements that promise to repair bad credit, prevention is the best way to avoid credit problems. Once negative information appears on your credit report, there is little you can do to clear it up if the information is truthful and accurate. However, over time – generally about seven to 10 years – this information is removed from your credit report. To prevent this type of damaging information from getting onto your credit report in the first place, as well as to improve your credit score and chances of obtaining future financing, be sure to make all your payments on time and do not ignore issues that arise with creditors.

Related Articles
  1. Credit & Loans

    Credit Card Review: QuicksilverOne Rewards

    Learn more about one of the best cash back rewards credit cards for individuals with average or good credit ratings: the Quicksilver Rewards from Capital One.
  2. Budgeting

    7 Tips To Bounce Back From A Credit Score Disaster

    Find out how to repair bad credit in seven simple steps.
  3. Credit & Loans

    5 Keys To Unlocking A Better Credit Score

    Follow these tips and techniques to rebuild a ruined credit rating.
  4. Personal Finance

    How A Bad Roommate Can Ruin Your Credit Score

    Living with someone can cut your expenses, but in addition to not doing the dishes, your roommate may do serious damage to your credit.
  5. Credit & Loans

    Check Your Credit Report

    Make sure there are no errors holding you back from obtaining a loan.
  6. Credit & Loans

    How To Dispute Errors On Your Credit Report

    It just takes some time and effort to rebound from a nasty case of "credit rejection shock."
  7. Credit & Loans

    What SoFi's Super Bowl Ad Means for Your Next Loan

    Non-bank lender SoFi will air its first TV ad during Super Bowl 50. Here's how it's challenging big banks by providing an alternative approach to loans.
  8. Credit & Loans

    10 Reasons To Use Your Credit Card

    There are several benefits to paying with credit instead of debit, if you use a credit card responsibly.
  9. Credit & Loans

    5 Extreme Ways To Raise Your Credit Score

    Desperate to rebuild your credit score because you can’t obtain a loan with a decent interest rate? Here are some extreme options to try.
  10. Personal Finance

    The Top 5 Personal Finance Experts to Follow in 2016

    Here is a look at five money and investing experts who can help you reach your financial goals for 2016.
  1. Does consumer protection cover my debts?

    The most impactful consumer protection laws and regulations in the United States are overseen by the Federal Trade Commission ... Read Full Answer >>
  2. Will a debt settlement program affect my credit score?

    In a very broad, general sense, debt settlement typically has a negative impact on your credit score. The impact depends ... Read Full Answer >>
  3. What's the difference between a credit rating agency and a credit bureau?

    It is easy to get credit bureaus and credit rating agencies confused, especially since credit bureaus are sometimes called ... Read Full Answer >>
  4. What are the differences between balance-to-limit ratio and debt-to-income ratio?

    Both your balance-to-limit ratio and your debt-to-income ratio are very important figures when you apply for and obtain credit, ... Read Full Answer >>
  5. What's the difference between credit score and credit history?

    Credit history refers to a consumer's past credit actions. Detailed on a credit report, it is a consumer's record of incurring ... Read Full Answer >>
  6. What is the difference between a loan and a line of credit?

    Standard loans and lines of credit represent two different methods of borrowing money for both businesses and individuals. ... Read Full Answer >>
  7. How will bankruptcy affect my ability to get credit in the future?

    Bankruptcy can impact your credit score more severely than any other single financial event. While not all bankruptcies actually ... Read Full Answer >>
  8. How does applying for student loans hurt my credit score?

    Shopping for student loans could have an impact on your credit score. Some credit applications, particularly applications ... Read Full Answer >>
  9. What's more important to lenders, my credit score or my credit report?

    Even though you may hear more about your FICO credit score, your consumer credit report is a more nuanced, complete and significant ... Read Full Answer >>
  10. What is the difference between student loan default and delinquency?

    Default and delinquency are different degrees of the same problem: missing payments. Your student loan account is considered ... Read Full Answer >>
  11. How long does information stay on my credit report?

    Different types of reported information stay on your credit report for different lengths of time; positive information can ... Read Full Answer >>
  12. How long do typical debt management plans take to pay off debt?

    Debt management plans are professionally budgeted and guided payment plans designed to help consumers repay debts. In some ... Read Full Answer >>
  13. Why is my rent on my credit report?

    The primary purpose of consumer credit reports is to provide lenders with an educated evaluation of a potential borrower ... Read Full Answer >>
  14. What debts don't have a statute of limitations applied to them?

    The statute of limitations on a debt refers to the legal time frame in which creditors may pursue a debt through the court ... Read Full Answer >>
  15. How do credit bureaus make money?

    Credit bureaus act as information brokers for consumer credit history. They are normally presented as agencies that sell ... Read Full Answer >>
Trading Center