Financial Know-How

Credit Report

When you were in middle school and you did something wrong they probably told you “This is going on your permanent record!” and maybe they pulled out a file to show you that they were indeed keeping tabs on you.

The idea though is still important; there is indeed a “Permanent Record” for grown ups, and it is called your “Credit Report.”

If you miss a credit card payment – ding - that’s going on your permanent record. If you’ve got a $950 balance on a credit card with a $1000 limit – ding- that is also going on your permanent record.

Fortunately your Credit Report is not just for any financial fumbles you may have, it also takes into account what you’ve done right.

Paid all of your bills on time for the last year – Ding! – that’s on your record. Worked at the same job all through college – Ding! – your good work history is also on there!

Now, your credit report is not as simple as a “Permanent Record”, it doesn’t keep track of how many speeding tickets you got as a sophomore, or how many times you skipped class, or even how much money you have in the bank. It really just paints a picture of how you handle your credit, so that when you go to buy something for which you need a lot of credit, such as your first home, there will be something they can look at to see if you’ll be a safe bet.

This information is compiled and calculated as a “Credit Score.” This is a 3-digit number that essentially tells a company how much of a credit risk you are; the higher the number, the less your risk.

Credit scores are calculated basically by five variables:

• Payment History; Do you pay your bills each month? Are these bills on time?
• Outstanding Debt; Do you have a lot of debt that would make it hard to repay any new debt?
• Length of time with Credit; Are you new to the world of borrowing and repayment?
• Number of inquiries to your credit report; Are you risking too much debt by opening new lines of credit on a regular basis?
• Your current types of credit; Is your debt mostly credit cards, or are you in more manageable debt such as a mortgage or student loans?

Lenders, whether they’re for credit cards, mortgages, student loans, or car loans, all want to make a return on their loan, and they do that by managing risk. If they give someone $10,000 they’d like to get that money back. The interest that you are charged depends on how risky they think you are. Before they hand over any money, the lender is going to look into the correct mix of risk and interest, as these two factors will hopefully lead to the full repayment of the money loaned to you.

If they think it is likely that you won’t pay back all of your loan, they will charge you a higher interest rate. This helps them quickly get more of your money. If the lender thinks it is highly likely that you will pay back the money quickly and completely, they will not need to charge you as much and will offer a lower interest rate.

So when you look for a loan, these lenders look at your credit score. If you have a low credit score, they’ll have to give you a higher interest rate. Maybe your score is low because you have a history of missing payments, the lender has to fear that you’ll miss payments with them as well, which cuts into their money, so up goes your interest rate.

On the other hand, say you’ve got a great credit report - then your interest rate will go down, as you display less risk to the lender.

When your score goes up	Your interest rate goes down
When your score goes down	Your interest rate comes up

It is important to make smart decisions now as you’re starting to build your credit history, so when you get ready to make big purchases - your first house or a new car - you’ll get a better interest rate, which could save you hundreds if not thousands over the life of the loan.

If you’d like to check your credit report for free, visit Annualcreditreport.com (http://www.annualcreditreport.com/).