The story from the credit report

On a gorgeous summer day in Seattle in 2012, I had just found a new place to live – a neat house by Green Lake, Seattle – a beautiful neighborhood in Seattle laden with trees, dogs, open space, and young people. In a nutshell, it was my perfect place to live at the time. Being born and raised in a tropical country, I always feel pumped up by the sun. The weekend I moved was also when Bumbershoot- the largest urban music festival in the country I believe – took place. I came back from the festival, totally exhausted, woke up the next day, fully invigorated again, and decided to move on with my next project in life. Applying for the first non-secured credit card. 

The first attempt was a bummer. Citigroup denied my application for their American Airlines co-branded card, and never even communicated with me. It struck me then: the cruel fact that my credit profile was not strong enough to help me obtain a high rewards credit card yet. Despite 8 months of perfect credit history and a good annual income, apparently I had not reached the status of credible borrower. Well then, where exactly did I stand and what would I have to do to improve?

A quick Google search revealed that in order to be approved for the best credit cards on the market, I’d need ‘excellent’ credit, determined by some sort of number they call ‘credit score’. A credit score is simply a numerical evaluation of your credit report, so like a credit report, a credit score is instantaneous. First, I wanted to figure out what this notorious credit report thing looks like, and was very happy to find that credit reports can come for free! Thanks to some federal law, everyone in the US is entitled to a free credit report from each credit reporting agency, also known as a credit bureau. The website to obtain your credit report through this channel is www.annualcreditreport.com . You’d have to provide your SSN to get your online credit report. This is how I got mine.

Once your credit report appears, make sure you save it to your computer. I don’t think you can go back to your free credit report afterwards; there’s a warning about this on the website.

Though excited about my first credit report, I was disappointed that it did not come with a credit score. Thankfully, the online report contained a link that pointed me to the credit bureau’s website which offers a trial subscription with a credit score. There’s nothing to lose, right? To ensure I wouldn’t waste any money, I searched for the phone number to call to request a service cancelation before signing up for the trial. TransUnion, one of the three credit reporting agencies (CRA’s), gave me a score in the mid 700’s, which is apparently pretty good. As a rule of thumb, a score of 700 or above is considered pretty good. I later found out that this score was not used by any creditors and therefore useless. However, TransUnion also gave me an enhanced credit report that explains why my score was what it was and how I could improve it. This was invaluable information to me, showing me the door to excellent credit, and inspired me to eventually start this blog to share with you what I wish I had known.

Imagine you’re interviewing for a job, and the interviewer asks you: “Tell me a little bit about yourself!” You tell him/her a story that best reflects your personality and qualifications. On the other hand, when you’re applying for credit, the creditor will say: “Give me your permission, and I will find out your story.” They will access your credit report, and see who you are as a borrower. Now that you know this ahead of time, you can prepare a better story by building a stronger credit report. Following are the main things a creditor wants to find out from your credit report:

1. Payment history. This is the most important of all. It documents your history of paying bills on time. Each time you miss paying a bill, especially a credit card or loan bill, your payment history is affected, severely. Bad news is that a missed payment will stay on your report for many years and impact your creditworthiness for just as long. You can figure out your payment history of each credit account from your credit report.
2. Amount of debt, the total amount of outstanding debt, including credit card balances, student loans, car loans, mortgage, etc. The more debt you rack up, the riskier of a lender you are. You can find out your total amount of debt by adding up the credit balances on your credit report. Unlike payment history, the amount of debt is instantaneous and memory-less.
3. Credit utilization, the ratio of credit card balances to total credit limit. The less you use your available credit, the better a financial position you tend to have. The report shows the balances and limits, so this is simple math.
4. Length of credit history, counting from the day you opened your first credit account. The more experience managing debt you have, the less risky a borrower you are. On your credit report, the oldest credit account reflects the length of credit history.
5. Amount of new credit, the amount of credit you have recently obtained or applied for. The inquiries section of your credit report shows how many credit applications you have filed recently. The accounts detail section reveals how recently opened your accounts are.
6. Average age of accounts, another indication of your experience with debt. The higher this number is, the more experience you have with each account on average.

Of these 6 factors, only the first one, payment history, has a long-term effect on your creditworthiness. The rest are either instantaneous or temporary. For example, paying off a balance will give you a new debt amount and a new credit utilization ratio and your new credit report will be updated. Paying your bills on time, on the other hand, doesn’t erase the missed payments in the past for several years. If you missed a payment last year, your account payment status will be x number of days late, where x is either 30, 60, 90, or 120. So please, never ever miss a payment!

These 6 factors are very important in determining your creditworthiness. Different lenders add their own lending criteria to the mix such as annual income, geographical location, and your previous financial history with them. But these 6 are the most commonly used. In fact, they are so universally that lenders over time have found a way to blend them all into one single metric to summarize your entire borrower’s story. The credit score.