A borrower's credit report is a history of his current and past loan transactions. It gives potential and current lenders an idea of the likelihood of repayment on current and future loans. Understanding and reading a credit report is a useful skill for any borrower.

Credit Score

The most important part of any credit report is the credit score itself. It is a numerical representation of a borrower's credit history. While scores can range from 350 to 850, most borrowers fall into the 600 credit score range. The higher the score, the better the interest rate will be for the borrower. The lower the score, the likelihood of obtaining a new loan diminishes dramatically. For most mortgages, a borrower needs to have at least a 620 to qualify for a new mortgage, with a score in the 700 or higher range giving the borrower the most optimum interest rates. A borrower should read the score as 350 to 600 as a low score. 600 to 700 as a middle range score and 700 to 850 as a high score.

Credit Report

The credit report lists the loan history that was used to calculate your credit score. While each borrower's report is different, each report consists of the same basic features: payment history, amounts owed, length of credit history, new credit and types of credit used. There are three different credit bureaus: Experian, Equifax and TransUnion. Each one will report the borrower's credit history and score in slightly different manners, but each can be read in the same manner. Negative items, or items that lower the borrower's credit score, are usually listed in a bold or red color. These items include late payments (30 days or later), collections, liens, judgments and bankruptcies. The more of these items on a borrower's credit report, the lower the borrower's credit score. Look through a credit report and search first for any errors. Are any accounts not the borrower's? Are any accounts listed as open that are closed? Are late payments listed incorrectly? Reporting these errors can help to raise a borrower's score. Look at each line of the credit history to see where improvements could be made to help raise the score. If there is an installment account, such as a credit card, the balance should be less than 30% of the limit to lower the impact of the balance on the score. Additionally, all unpaid debts, such as bankruptcies, collections, liens and judgments should be paid in full to reduce the impact on the score as well. The bottom of the report (or the top depending on the format used) gives the borrower an overall view of the credit report and should list the reasons for a reduction in his score. There is no such thing as a perfect credit score, so there will be a reduction of some type regardless of the credit history.

Source:

MyFICO.com: How Your FICO Credit Score is Calculated

Experian.com: Credit Score Basics

Experian.com: What is a Good Credit Score?

More Information:

AnnualCreditReport.com: Home Page