All You Need to Know about Credit Reports

by the Investionary Staff

An individual’s credit rating is one of the most important aspects of his or her financial well-being, affecting not only applications for credit lines or mortgages but also insurance, employment, and leases. If you have ever applied for a line of credit, a personal loan, a job, or insurance, you have a credit record. The records are maintained by consumer reporting agencies (CRAs), which are regulated under the Fair Credit Reporting Act (FCRA.

Your credit record includes your place of employment; your current and previous addresses; the number, type, and age of accounts you hold; your payment histories for the accounts, with particular attention paid to late payments (usually set at 30, 60, 90 days, etc.); collection actions; and total outstanding debt. This information is used by third parties to determine whether an applicant is credit worthy.

One of the most widely used systems employed in evaluating applications for credit cards, auto loans, and home mortgages, is called credit scoring. This is a statistical program that compares an individual’s credit report to the credit performance of people with similar profiles, with points being awarded for each factor. The total number of points received is used to predict how likely the individual is to repay a loan through timely payments.

The prevalence of the use of credit scoring is due to its basis on factual data and statistics, as well as its objectivity. The way that creditors usually develop their systems is by selecting a random sample of its customers and examining it statistically to determine what characteristics relate to creditworthiness. Next the creditor assigns a weight (or number) to each determining factor; this represents how well each factor predicts who will or will not be good credit risks.

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