How Does Credit Reporting Work?

Most people are aware that credit scores affect whether or not they are approved for an auto loan and how high their interest rate will be, but how does the process work?  What is considered when a lending agency calculates your total score?

The three reporting agencies where your loan institution gets their information from are Equifax, Experian, and Trans Union LLC.  They can located online and contacted directly to request a copy of your report from each agency.  Each loan institution calculates your credit score differently.  They may consider your score from just one, or all three reporting agencies.

Your credit score is also referred to as a FICO score, and can range from 300-850.  Many people fall somewhere in the 600’s or 700’s range.  Most lenders consider a score of 700 or above a good financial risk.  Scores below 600 indicates the possibility of high risk and lenders may charge a much higher interest rate, or even turn down your loan application if your score is below 600.

There are 5 parts of the total FICO score.  Payment history is 35% of your total score, available credit (considering how much you owe on current accounts) is 30%,. Longevity of credit accounts for 15% of your total credit score and the remaining 20% is calculated according to any new credit being applied for (multiple new inquiries can decrease your score) and the type of accounts you have credit with (the more diverse the variation, the higher your score.)

Your credit score changes when your payment history changes or new credit accounts are opened or paid off.  You can improve a poor credit score over time by changing the way that you manage your credit.