When you start paying attention to your finances, you end up becoming more familiar with your credit report. However, you may not know all of the terms you see and what they mean. Understanding credit report terms is integral to knowing what’s in your credit report, what your credit report means, and how these factors impact your credit score. Here are five important terms you need to know.
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1. Credit Score
Your credit score is a three-digit representation of your credit history. Companies may use a scoring system to calculate their own proprietary credit score. In fact, you don’t have one single credit score — you may have many. Generally, some of the biggest contributors to your credit score (also known as your credit rating) are:
- Timely Payments: Whether or not you pay your bills on time every month may be one factor when it comes to your credit score.
- Credit Utilization: This means how much of your available credit you’re actively using.
- Credit History and New Credit: Having a longer credit history with accounts that have been in your name for many years may positively contribute to your credit score. On the other hand, many new credit lines taken out over a brief period of time may negatively impact your credit score.
- Credit Mix: This means using different types of credit, for example, an auto loan or a personal loan, in addition to your credit cards.
2. Credit Inquiries
A credit inquiry is when someone looks into your credit history, often to determine your creditworthiness. Some companies will perform what is called a “soft” inquiry, which may be to evaluate whether they should market a credit product to you, or to monitor your credit relating to an existing account. This will not impact your credit score. When you apply for credit, companies perform “hard” inquiries when looking into your credit history, among other factors, when deciding whether to approve or deny your application. This may impact your credit score.
Delinquencies are, in short, any credit obligations you’ve failed to meet. This can be as simple as one late payment, which likely has a negative impact on your credit score. Two months past-due and three months past-due are further delinquencies, and charge-offs are when a company no longer considers your account to be an asset and may place your credit with a third-party collection agency.
This is the amount of your available credit that you’re using at any given time. A Credit Karma survey showed that people with lower credit utilization tend to have better credit scores. This is because people who have lower utilization tend not to be exclusively depending on credit and tend to manage their debts better, thus making them less risky for potential lenders.
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Eventually, if you stop paying for a certain period, your creditor “charges off” your debt, meaning it no longer considers it to be an asset. At that point, a creditor may decide to place the debt with another collector. However, you are still liable for the debt that you accrued.