When people find themselves in financial distress, they often wonder how their problems affect their credit score. Although everyone understands that their credit report is essential to how they live their lives, there are a lot of misconceptions around how it all works. In this article, we will look at what a credit report is, how it is adversely affected, and how you can work to repair your situation.

A Credit Report, Defined: 

Your credit report is a type of financial resume or financial medical record. It includes the entirety of your credit activity and history with all of the entities that have extended credit to you – whether via loans, credit cards, or mortgages. It also includes your payment history, a record that allows potential lenders to assess your ability and willingness to repay the money loaned to you.

How to See Your Credit Report:

The FACT Act (Fair and Accurate Credit Transactions Act of 2003) stipulated that every consumer was eligible for one free copy of their credit report from each of the three national credit reporting agencies every 12 months. Individuals can access credit reports from all three agencies (Equifax, TransUnion, and Experian) at AnnualCreditReport.com. Checking your credit reports annually helps to guarantee that the reported data is accurate and allows you to monitor for potential identity theft.

Viewing your credit report is considered a “soft inquiry,” and it will not adversely affect your score. Hard inquiries, such as a lender pulling your credit to assess your application, will affect your credit score.

Credit Report vs. Credit Score: 

A credit report shows the detail of your credit history. A credit score is a numerical representation assigned based upon those details. A credit score can range between 300 and 850. Depending on the lender and the loan type, varying scores may be considered “acceptable.” The higher your credit score, the better you are viewed by lenders. Lenders and credit reporting agencies use different scoring models to establish credit scores, and the score you see may not be the score they use to evaluate you. 

A credit score is calculated using the data in your credit report. Your credit score, therefore, will fluctuate as the information and entries on the report change.

What the Score is Based On:
Typically, scoring models utilize credit report data in six main categories

  1. Payment history. Payment history establishes how responsible an individual is in regards to making payments on time. 
  2. Amount of outstanding credit. All open credit balances, when added together, indicate your remaining borrowing potential.
  3. Credit utilization. This metric assesses how much personal available credit is used and if you are nearly maxed out. 
  4. Credit history. The amount of time you have been using credit proves your established history and experience using credit. 
  5. New credit requests. The report shows any new accounts and authorized credit inquiries that could result in further credit lines. 
  6. Credit mix. This metric determines if you have experience with different types of credit, for instance, both car loans and credit cards. 

Most Important Aspect of the Credit Score: 

There are two aspects of your credit report which have the most impact. New lenders are looking for payment history – how faithfully and promptly you paid your bills – and credit history.

Duration and Age of Information of the Report:

Generally, any adverse information on your credit report drops off seven years after the first account delinquency. Personal bankruptcy information stays on the report for up to 10 years from the date filed but may drop off earlier depending on the type of bankruptcy filed. Alternatively, positive information regarding mortgages and car loans remains on your report for up to 10 years from the date of last activity on the account. For credit card accounts, positive history will stay on the credit report for as long as the account remains active.

If you are considering filing for bankruptcy, you may worry about how the process may affect your credit report. The truth is if you are in a financial crisis, your credit is already being affected. Taking a proactive step towards fixing your situation may affect your credit report short term, but in the long run, it may be a positive move for your overall financial health.

For more information about filing bankruptcy, call a local expert. Richard V. Ellis is a Sarasota bankruptcy attorney who has helped hundreds of individuals and family to get back on the road to financial recovery.