Posted: Wednesday February 23, 2022
Credit reports are notoriously exhaustive and confusing. If you’re like most people, you need an experienced person helping you understand this crazy document. If you’re in a position that requires you to read a credit report – whether it’s your own or someone else’s – it’s important you have the confidence to make sense of it yourself. Below, we discuss four things you should know about credit reports.
Since the culmination of any credit report is its credit score, we’ll start with that. It’s important to note here that the credit score shouldn’t be the only factor that drives your decision to extend credit to someone. There are a lot of extenuating circumstances that go into this number, so it’s crucial that you dig deep into the details of the report to uncover a person’s true financial obligations.
800-850 – Excellent
It’s not often you see a credit score this high, but if you do, it’s a good indication this person has done everything right.
700-800 – Great
A credit score in this range indicates that the person’s financial status isn’t perfect, but it’s pretty darn good. Extending credit to someone with a score this high isn’t usually much of a risk.
650-700 – Good
Scores in this range aren’t bad, but there are definitely some issues that need attention.
600-650 – Fair
Credit scores in this range are going to include several issues that need explaining. Red flags in the report should be investigated thoroughly to understand exactly why the score is so low.
Under 600 – Poor
Significant issues are probably to blame for scores below 600. Be leery of extending credit to anyone with a score this low as the risk is high you will have a hard time collecting.
When you look at the beginning of a credit report, it gives you a summary of the information contained within. That summary is a three-digit number, otherwise known as the credit score and a quick rundown of the major factors that affected that number. Even if the credit score is decent, it’s important to delve deeper into the report to gain a full understanding of the person’s financial status.
In this section of the credit report, you’ll learn just how much credit the person has used. Each person only has so much available credit. For example, if a person’s available credit is $100, and the credit report says they’ve used 47 percent of that, they’ve already borrowed $47 of the $100 they have available to them.
Obviously, the closer they are to using up all their available credit, the less likely a lender is to extend more credit.
Preceding the payment history section are the Total Monthly Payments and Total Debts sections. While informative, these sections really don’t tell you anything about the person’s actual cash flow or how likely he or she is to pay you back. The Payment History section, however, tells a very detailed story – both current and past.
In the Payment History section, you’ll discover the number of times a person has been late or missed payments and whether they’ve completely neglected or ignored their financial obligations. You’ll see accounts that have been turned over to collection agencies, too. An “All Clear” or “None” indicates no issues at all.
The information above is a quick look at how to read a credit report. There is a wealth of information contained in a credit report, so it’s important you don’t just focus on the credit score itself. If you’re in a position that requires you to read a credit report, learn everything you can to gain confidence in your ability to understand them to make informed decisions.