How Do Credit Reports Affect Credit Scores?
Most people already know that there is a significant link between credit reports and credit scores. If someone has a bad credit score, it often means that their credit report contains a number of negative entries, including defaults, missed payments, and overdue amounts.
On the other hand, if someone has a good, or higher than average credit score, it means that they have proven themselves to be a reliable debtor in the past, and therefore they are more likely to be worthy of new credit in the future.
Each Positive Entry Counts
When it comes to the algorithm used to calculate a credit score from the entries of a credit report, you should understand that every single entry on the report is used.
That means that even if you have five positive entries in the last 12 months, with two negative entries in the last 18 months, the past will still catch up with you and those two negative entries will have a great impact on your final credit score.
In general, here is how the credit report algorithm works:
- Positive entry is worth 1 point.
- Negative entry is worth -2 points.
- Neutral entry is worth 0 points.
By looking at the above, we can see that negative entries have more of an impact relative to positive entries. That is ultimately because even a single negative move in regards to your past finances is looked upon as being a sign of unreliability, disorganisation, and risk.
How To Know Which Entry is Which?
Sometimes it is difficult to distinguish positive entries from neutral injuries, and this is something which credit reporting agencies have tried to focus on in recent times by providing informational guides and instructions along with credit reports which have been requested.
However, if your credit report didn't come with an informational booklet, distinguishing the two entries really is quite simple.
Take a look at these following example entries, and their classifications:
- Balance paid off in full - positive.
- New debt application accepted - positive.
- Check of your own credit record - neutral.
- Failed attempt to file a dispute - neutral.
Ultimately, if you use your logic, you should be able to work out which entries are positive and which are neutral. At the very least, you should be able to immediately identify those which are negative.
