What Credit Reporting Agencies Do Not Tell You

Credit reporting agencies manage the record of activity associated with your personal financial history. There are three main credit bureaus: Experian, Equifax and Transunion. Each bureau has its own formula for finding your score, but they all track the same things.

Most people generally understand that good credit comes from making loan payments on time, and bad credit comes from missing payments or defaulting on loans. While this is generally true, there are a number of other parts to a credit score.

Balancing Installment and Revolving

There are two types of loans. Installment loans are given in one lump sum paid off over monthly installments. Revolving loans are like credit cards, a borrower decides how much of a limit to use each month and how much to pay down toward the balance. Most individuals have a credit card, meaning they have a revolving loan. But simply managing a revolving line well won't result in good credit. You need to also have a few installment loans, over time, to boost your score.

Having too Much Debt

If you have too many open credit lines, your credit score may suffer. It is best to keep only 2 or 3 credit cards instead of opening one at every department store or retailer that offers a card. Financing purchases like computers and electronics is not bad in itself, but doing it too often can mean you will have too much debt on your record. Your debt to asset and debt to income ratio will come into play on your credit score or loan application.

Having a High Balance

Just because you have high credit limits doesn't mean you should use them. Even if you are under the limit on all of your credit cards and make monthly payments, you will have a bad credit report if you have high balances.

It is best to retain 10% of less of your limits. You may make larger purchases during the course of a month, but keeping the balance low at the end of the month is key. Using your credit cards and flexing your credit is better than not using it at all, but you should be sure to pay down balances before seeking any new loans.

Modifying Loans

If you modify any of your loans, the lender will report the modification to a credit bureau. Lenders lose money when you modify a loan because it is closed according to terms they did not anticipate. Modification includes refinancing, settlement, consolidation and prepayment. In each of these cases, the lender will make less than anticipated, and the action will result in a nick against your otherwise good credit.

Outstanding Bills

Your utility companies and doctors will not report to the credit bureaus when you make a payment. Positive activities here go unreported. However, if your bills go to collections, you can expect a significant drop in your credit score. Many find this to be an unjust practice because it does not go both ways. Just or not, you need to make sure to pay all bills in order to keep your credit report clear of negative marks.


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