Your credit report is basically a record of why someone would or would not want to lend you money. If you have good credit, that means you have done a lot of things to make a lender think, “Wow, if I give money to this guy, he’ll definitely pay me back when he’s supposed to.” On the other hand, if you have bad credit, that means your credit history (or lack thereof) makes a lender think, “Huh, I’m not so sure about this guy. It could be pretty risky to let him borrow my money.”
Credit reports show how many loans and credit cards you have and how you manage those accounts. Reports will also include information on collections accounts, bankruptcies, foreclosures, judgments, tax liens — it’s a record of your past interactions with creditors.
In a loan situation, you’re essentially asking a stranger to let you borrow thousands of dollars, and that person needs to decide whether or not it’s a good idea. So it makes sense that person wants to know how you’ve handled borrowed money before, which is why it can be so difficult to get a loan or a credit card when you have no credit history.
Your credit standing is an assessment limited to a certain group of behaviors — neither your job, relationship status, income, religion nor your cheerful demeanor has anything to do with it. However, your payment history on your debts, length of credit history, debt usage, mix of credit types and inquiries for credit all have everything to do with it.
It’s pretty easy to figure out if you have good credit in general. Let’s start with this incredibly oversimplified, yet helpful, chart:
Click to enlarge
There’s a lot more that goes into it than that, obviously — companies like FICO and VantageScore spend years compiling algorithms that determine whether or not you have good credit — but that’s the basic idea. As you may have noticed, making late payments on your loans or credit card balances is a credit killer. If you want to know more about exactly what gives you good or bad credit, you can check two of your credit scores for free at Credit.com. Once you do that, you can put together a simple plan for building your credit.
More on Credit Reports and Credit Scores:
Top image: Xesai; Chart: Christine DiGangi