How to Decode Your Credit Report (and Understand What Lenders are Looking for)

Kayla Albert Unison

How to Decode Your Credit Report

Unless you’re a seasoned financial professional, understanding your credit report can feel a lot like deciphering a foreign language. But considering the weight it can carry in determining your creditworthiness to a lender, it’s worth taking a few extra minutes to sort through the details.

Follow this guide to better understand what you’re looking at and catch any red flags before a lender does.

Credit Report Basics

While each of the three credit reporting agencies (Experian, TransUnion, and Equifax) present the information differently, your credit report will always have the same categories of information, including:

Personal information: This includes your name, date of birth, social security number, addresses tied to that information, and any other pertinent information to identify you.

Financial Accounts: This information might be split into different sections (accounts in good standing and accounts in default, for example), but your report should have record of each of your financial accounts, both open and closed.

Payment History: One of the more important pieces of information attached to your financial accounts is your payment history and whether you’ve had any late payments or accounts in delinquency.

Credit Inquiries: Inquiries into your credit are collected and displayed on your report. While some inquiries, like for pre-approval offers, aren’t viewable by everyone, you should be able to see them all.

Public Information: If you have had past bankruptcies, liens, judgements, foreclosures, or accounts in collections, this information is also displayed on your report.

What Are Lenders Looking For?

Credit Score

If you’ve ordered your free credit report from each of the three credit reporting agencies, you won’t see a credit score attached to it. However, this is an important piece that can determine if you are approved, the type and size of the loan, as well as the interest rate. Here are a few guidelines:

  • FHA Loans
    Minimum score of 580 with 3.5% down.
  • VA Loans
    Minimum score of 620-640 depending on the lender, with 0% down.
  • Conventional Loans
    Minimum score of 620. You need a score of 680 to avoid jumping through additional hoops. A score of 740+ is ideal for landing the best rates.

Age of Credit

Your report tells the age of your credit by averaging out the length of time your accounts have been open. So while your oldest account may have been established 20 years ago, an account opened just a week ago could drag down that average drastically.

Payment History

Payment history makes up 35% of your FICO credit score — for good reason. It paints a clear picture of how you’ve handled credit in the past, showing how many payments you’ve missed and how recently these missed payments occurred.

Lenders want to see how risky of a borrower you may be and how likely it is that you will pay your mortgage on time, every time.

Bankruptcies, Liens, Judgements, Collections

Large financial events like a bankruptcy or an account currently in collections can signal significant financial distress for lenders. These events should carry less weight the longer it has been since they occurred, but you may still need to have an explanation ready.

Credit Utilization Ratio

One large indication of whether you are capable of taking on the financial burden of a mortgage is your credit utilization ratio. This is a percentage determined by taking your current debt level divided by your available credit. While there isn’t a hard rule, many suggest keeping this below 30%.

Number of Credit Inquiries

Lenders don’t want to see signs that you are trying to obtain credit from several different sources right before you try to secure a mortgage loan. So even if inquiries didn’t turn into new accounts, it can still signal an issue.

Types of Credit Used

The more variation you have in your credit history, the more experienced you appear to a potential lender. So having a mix of both installment loans (i.e. auto loans, student loans, mortgages) and revolving credit (i.e. credit cards, lines of credit) can help.

Check and Double Check All Information Reported

 If you aren’t already convinced of the importance of checking your credit report before seeking loan approval, consider this: In 2016, there were 43,000 consumer complaints made to the Consumer Financial Protection Bureau about credit report errors. The bottom line? Chances are high you might find a mistake on yours.

Make sure you pay careful attention to both the basics (like your name, social security number, etc.) and all of the nitty gritty details (like credit limits, account statuses according to your creditors, etc.). If you find any errors, here’s how to dispute them.

About the Author

Kayla Albert

Staff Writer

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Kayla is a writer and editor who has written about many consumer finance topics, including credit, budgeting, retirement, and home-buying. She likes connecting readers with advice relevant to their life.

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