There are several key things that a credit report reveals about a person – which is one reason employers frequently use them as part of the employee screening process. A full credit report isn’t really necessary. The credit score alone tells a lot about someone, since high credit scores can only be achieved by practicing fiscal responsibility and diligent money management. The details of how the score is achieved can be telling, but the score alone tells its own story.
Do you pay on time?
This is probably the most important factor in your credit score, and therefore it’s important to potential lenders, landlords and employers. It comprises 35% of your credit score, the single largest factor in the calculation. Surprisingly, there are people who are able to pay, but have a terrible history of not paying on time. Whether or not you have the ability to pay isn’t really relevant; what is relevant is whether you demonstrate fiscal responsibility by actually making payments on time.
What do you owe?
The amount of credit you use makes up the second-largest portion of your score (30%). Do you have multiple credit cards that are at, or nearly at, the limit? This will lower your score.
For a secured loan, a lender will evaluate your debt-to-income ratio. Your debt-to-income ratio is based on an algorithm of your income versus your level of debt and available credit. If an underwriter of a secured loan feels your debt-to-income ratio is too high (i.e., your monthly obligations will be difficult to pay if you use all the credit available to you), you may not be approved for a loan, or you may be required to pay off and/or otherwise close some of your credit accounts before being approved. However, when you get unsecured loans, such as credit cards, your debt-to-income ratio is not calculated. Therefore, this component of your credit score becomes crucial to institutions granting unsecured lines of credit.
Using all the credit available to you will lower your score. The rule of thumb is to keep credit cards at 30% or less than the total credit limit on the card.
Are you expanding your use of credit?
Every time you apply for credit, your score takes a hit. At 10% of your score, this isn’t a large factor. It can also be a good-bad thing to apply for credit. You have to have credit to establish a credit history and therefore a credit score; however, multiple applications in a short period of time can signal a desperate need for more credit and the possibility that you’re using one form of credit to make payments on another because you can’t otherwise afford your monthly obligations.
What you can learn about someone
It should be obvious why a high credit score is important to a lender or anyone providing regular services, such as utilities, a landlord and a telecom company. What is less obvious is why a potential employer would want this information. To a potential employer, a high credit score demonstrates responsibility and follow through, traits that are desirable in an employee. If you don’t pay your bills on time, it is assumed that you have issues with being responsible in other matters, or that you are not the type of person to follow through.
While it might be useful to have credit score information about significant others, people you’re dating or even neighbors, this is not information just anyone can obtain. You have to have a legitimate reason to obtain someone’s credit score or credit report, and you have to have their permission.
