FIRST IN A NEW SERIES: Anatomy of a Credit Report
In this issue of The Score, we begin a five-part exploration of the sections of consumer credit reports that have a direct bearing on your credit score, and the relationship between the information they contain and your score. You can (and definitely should) obtain free credit reports once every twelve months at AnnualCreditReport.com.
Reports from the three major credit reporting companies—Equifax, Experian and TransUnion—are formatted differently, but each groups information in similar sections: personal information, accounts activity, public records, and credit inquiries. Although it’s crucial to ensure your personal information is accurate, this series will disregard that issue, as it has no bearing on credit scores. Instead, we’ll consider the other four sections. This installment and Part Two of the series examine the account activities section of the report. Part Three will look at the public records section, Part Four will consider the section on credit inquiries and Part Five will look at the section that lists collections information.
By John Ulzheimer
The Ulzheimer Group
In December 2012, the Consumer Financial Protection Bureau (CFPB) published a study quantifying the amount of information managed by credit-reporting agencies. Along with the three major credit-reporting companies (CRCs)—Equifax, Experian, and TransUnion—there are more than 10,000 other companies that furnish information to the credit-reporting industry. Collectively, these companies provide the CRCs information on about 1.3 billon accounts, or tradelines, every month.
“Tradeline,” or simply trade, is industry-speak for an account or credit-related liability. For example, my American Express card shows up on my credit reports as an account or, more formally, a tradeline. The bulk of information appearing on most credit reports concerns trades. If you’ve had a dozen credit accounts over the past 10 years, it’s very likely that your credit reports from all three CRCs will contain a record of all those accounts. This voluminous section of your credit report contains the information that is most influential on your credit scores.
Credit-scoring models generally consider several categories of information contained from your credit report data:
· Age of your credit reports,
· Diversity of information present,
· Presence (or lack) of negative information
· Debt, and
· Inquiries, or requests from potential lenders to obtain your credit score when considering your application(s) for credit
Trade, or account information, impacts four of these named categories. The inquiry category is the only one where trade activity is not considered.
Trade is either all positive or includes something that is negative, like a late payment or a past due balance. Trade also has a balance, albeit possibly a zero balance. Trade also has a date opened, which allows scoring models to consider its age and the average age of all trade. And finally, trade is identifiable by type (mortgage, installment, revolving), which allows scoring models to consider the predictive nature of having that type of account on your credit reports.
There are several primary metrics that are heavily or entirely influenced by trade. For example, a common measurement taken by credit-scoring models is the average age of your accounts. If, for example, you have 10 trade lines that were all opened 10 years ago, then your average age of trade is going to be 10 years. Ten years is likely going to yield more credit score points than someone whose average age of trade is one year.
Another common trade metric is the number of accounts with a balance greater than zero. A consumer who has 10 accounts with a balance, for example, is likely to be considered a higher risk than someone who has only two accounts with balances. These consumers’ respective scores will reflect this difference in credit risk: The consumer who has fewer accounts with balances will earn more points from that particular trade metric.
Finally, someone who has trade that is void of any derogatory information is going to earn considerably more credit score points than someone with trades reflecting derogatory information. For example, if you have a record of accounts that were paid late and even went into default, your credit score will likely be lower than someone who has never missed a payment. One credit profile indicates elevated credit risk, while the other indicates a low level of credit risk.
Next month, we’ll explore other important trade-related metrics and how they influence your credit scores. We’ll cover the infamous debt-to-limit ratios and how the age and severity of negative trade influences your scores. We’ll also cover how narratives, or the textual context, that often accompany trade can impact your scores.