Monitoring your consumer credit report and credit score
Before you apply for credit, closely examine your consumer credit report and score to make sure they are up to a potential lender's standards.
When you apply for a loan or other credit, lenders will look at both your business and personal credit score and report to help determine your creditworthiness. Let's take a closer look at what a consumer report and score can show a lender about your credit profile.
Consumer credit score
A consumer credit score is a three-digit number that represents your creditworthiness. The higher your score is, the less risky you are to lenders. Your score is calculated based on the data in your credit report and plays an important role in your ability to qualify for financing. The key elements that go into it are payment history, outstanding debt, how long your credit has been established, the types of credit accounts you carry, and recent credit activity. There are three main consumer credit agencies that report this number: Equifax, Experian, and Transunion. Your credit score will likely vary with each agency. FICO® Scores are the most commonly used credit risk scores by lenders in the U.S. They are created by Fair Isaac Corporation (FICO®).
Consumer credit report
A consumer credit report is a detailed summary of your personal financial history and helps lenders determine how responsible you are with your finances. Your consumer credit report includes details on your current and past credit accounts, credit inquiries (the number of times you've applied for credit) and public information about bankruptcies or tax liens. Credit agencies receive this information directly from banks and companies you do business with. Federal and state laws govern who can access your personal report and requires the agencies to let you order copies yourself.
Your business credit report will contain a lot of the same information as your consumer credit report, but will be specific to your business's credit track record.
What to look for in your consumer credit report
Here are a few factors lenders look at when examining your personal credit report:
Payment history: Making timely payments on your accounts is a big deal for potential lenders and makes up 35% of your score. If you have missing or late payments on your credit report, lenders may question your responsibility as a borrower and think twice about approving you for credit.
Outstanding debt: The amount of debt you currently owe is also an important factor for lenders and contributes to 30% of your score. If your debt load is too high, lenders may worry that you will have trouble paying new debt.
Length of credit history: This accounts for 15% of your score. The longer your history of making timely payments, the higher your score will be.
Types of credit: The types of accounts you have make up 10% of your score. Having a mix of accounts, including installment loans, home loans, and retail and credit cards may improve your score.
New accounts: Applying for credit and opening several credit cards in a short time frame may make lenders wary of your financial situation. They may think that you are in a financial bind and wonder if you will be able to pay back new debt. However, if you are looking for a mortgage, auto, or student loan, multiple lenders may make an inquiry. For this reason FICO Scores ignore such types of loan inquiries made in the 30 days prior to scoring.
If you have a strong understanding of what lenders look for in your credit report and take the necessary steps to maintain a positive credit rating and a high credit score — both personal and business — you can increase your chances of getting approved for financing.
Learn more about building both your personal and business credit scores before applying for credit.