FinLit #3 — Credit history, ratings and reports

Today’s post is a continuation of the last post about credit. As a recap, credit is a contextual agreement that the borrower will return the lender what is owed, most of the time with extra. There are different types of credit and entities as well as individuals have assessments based on their creditworthiness. Today’s lesson will consist of credit history, credit rating and credit report.

What is …?

Credit History is a record of a consumer’s ability to repay debt and demonstrate responsibility in repaying debt. Credit history consists of many types of credit accounts (i.e., student loan, credit card, mortgage, small business loan), how long those accounts been open, the amount owed, the amount of your line of credit used, history of payments of debt and many credit inquiries.

Credit Rating is an assessment of your creditworthiness. Credit ratings are assigned to individuals, corporations, state or local authorities and sovereign governments. Credit rating is the correct term used to assess the credit of businesses and sovereign governments. These assessments are done by credit rating agencies Moody’s, Fitch, and Standard and Poor. The correct term for individual credit assessments is credit scores.

So yesterday when you signed up for a credit karma account if you did not already have one, it revealed your credit score.

These scores are assessed by three major credit bureaus Equifax, Experian and TransUnion. High credit rating/score suggest a strong possibility of paying back while low credit score/rating is the opposite. Credit scores range from 350–850.

Credit Report is a detailed report of your credit history. The report is broken down into four part: 1) personal information such as name, address, social security, 2) detailed information on your lines of credits (also called trade lines), 3) Public records information such as any bankruptcies, judgement, liens and 4) list of entities that have recently inquired about your individual credit report (the credit inquiries)

Credit history is a tracker of your creditworthiness, credit rating is an assessment of your creditworthiness based on your track record, and a credit report is a documentation of all that information. 
The credit report = credit history + credit score.

Special Note: ** Users are entitled to free credit reports annually from companies. Also, federal law also entitles consumers to receive free credit reports if any business has taken adverse action against them. This includes denial of credit, insurance or employment as well as reports from collection agencies or judgments, but consumers must request the report within 60 days from the date the adverse action occurred. Also, consumers who are on welfare, people who are unemployed and plan to look for a job within 60 days, and victims of identity theft are also entitled to a free credit report from each of the reporting agencies.**

Implications and Effects of Credit

You may ask why is credit important to me?
In the last post, I meant that your creditworthiness — going forward we’ll use the word credit score — grants and denies consumers particular services and resources.

Two examples:

  1. You want to move into your first apartment. The homeowner or real estate broker has no way to access whether or not you will pay your rent on time or at all other than a report that shows your history of paying debts. If your credit report shows a good indicator such as a high credit score which consists of having a good credit history, the homeowner will feel more secure in renting you the apartment. However, if you have a poor credit report, the homeowner can conclude that you have a history that would suggest you would not pay all of your rent on time or at all.
  2. You need $50,000 to start your business, and you do not have family or friends that can help you out. Therefore you go to the bank and ask for a loan (a line of credit). Rightfully so, the bank will check your credit report. Now if you have a good credit report, the bank will be more inclined to give you the loan. NOTE: ** Credit scores alone will not get you a business loan, you’ll need a business plan as well. ** Also banks do not just lend people money for nothing. As a result, they’ll require you pay them a little more than they initially offered you. That extra is called interest. Most lines of credit come with interest. Interest usually depends on your credit score. Tomorrow we will go in-depth into interest because it is a topic that needs a post of its own. But for now just know that if your credit score is high, you will typically get a lower interest rate. Now if your credit score is low either the bank will deny your request for a loan or they will give you the loan with a higher interest rate than the person with good credit score.

What is good and bad credit?
Anything below 600 is considered poor credit. Anything about 700 is good credit. In-between those two is fair to credit. Your reliability as a borrower is so-so.

How can I apply this knowledge?

Now that you know what credit history, credit rating/score, and credit report are, you can parse through your credit karma account.

If your score is below 600, there are two immediate things you can do to improve it. 1) Reduce your debt owed 2) make your debt payments on time.

If your score is above 700, then good work! Continue to keep following the two steps above. Also maybe apply for a new credit card.

If your score is in-between 600 and 700, you are a little more complex. In addition to doing what I suggested for the first two groups, read through your credit report to figure out what is the cause of the subpar score. Usually, it’s a combination of things such as a late payment; you’re utilizing too much of your line of credit, you have a collection against you or not a long enough history of credit.

I am going to release an additional credit post to supplement today post that gives examples of credit score situations and how to improve them.

I know I promised to define those words from the last post, but I found it better to get into the details of credit in the next post. Tomorrow we’ll talk about Interest rates.

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