Personal Credit Report: Explanation of Contributing Factors

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  • 0:02 Credit Reports and Scores
  • 0:56 FICO Score
  • 1:31 Components of a Credit Report
  • 3:59 Lesson Summary
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Lesson Transcript
Instructor: Tammy Galloway

Tammy teaches business courses at the post-secondary and secondary level and has a master's of business administration in finance.

In this lesson, we'll discuss your credit report and score. You'll also learn about the contributing factors of history, maximization, time, and composition.

Credit Report and Scores

Jenny meets with her loan officer to discuss her options in purchasing a home. This is Jenny's first home so she's super excited. John, the loan officer, starts by telling Jenny he has bad news: she wasn't approved for a home loan. John says, 'We pulled your credit report and score and there were too many negative factors that led to our decision.' A credit report is a written report of your debt and how well you've paid it. In addition, there's a FICO score, a credit score administered by the Fair Isaac Corporation, which provides a numerical value of several categories that make it easy to determine if you're indeed credit worthy.

For the rest of this lesson, we'll discuss the FICO score and the factors that affect your credit report: history, maximization, time, and composition.

FICO Score

John shows Jenny her FICO score of 590. He tells her if the score would have been at least 600, then the mortgage lender would have approved the loan but with a higher interest rate. Interest is the cost of borrowing money. When a lender believes you're a high-risk, meaning you have a history of paying late, have too much debt, or have no credit history, they may substantially increase the interest rate. However, if you have a score above 700, your interest rate will be much lower, since the risk of you defaulting on the loan is minimal.

Components of a Credit Report

Now let's understand the four main components of your report.

Payment history is how well you pay your credit accounts. Lenders want to see how well you've paid your accounts. Your credit report shows how many times you've been late and how late you've been. Each account shows if you've been 30, 60, 90 or 100+ days late. In Jenny's case, she's been late many times. Payment history comprises 35% of your score.

As John tells Jenny, another factor affecting her score is maximization, or using all of your available credit, because Jenny has maxed out her credit cards. In sum, using credit does not negatively affect your score, however, using all of your available credit will. John explains to Jenny that she has 5 credit cards, each with $1,000 limit for a total of $5,000. The balance on all five credit cards is $4,500, calculating her maximization at 90%. Lenders like to see maximization around 30% or less and maximizing accounts for 30% of your score.

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