The Definition of a Credit File

Credit files are important tools that represent your borrowing history. It is essential to understand what is in a credit file and how to protect your credit score. Several different types of data are kept in your credit file, including the amount of credit available to you, the amount of credit you have used and your payment history.

Types of Credit

There are two separate and distinct types of credit, or loans, that are given to consumers. Secured loans are loans that have collateral; you borrow money to buy something that the lender could take back if you do not pay. Mortgages and car loans are secured loans, and if you fail to pay your mortgage or car note the bank can foreclose on your home or repossess your car. Unsecured loans are loans where the bank lends you money to do whatever you would like. There are no assets that the bank can take back with unsecured loans. Credit cards are unsecured loans, and the interest rates are generally higher.

What is a Credit File

Every time you borrow money for anything, that borrower reports the amount you borrowed and the type of loan to one or several credit reporting agencies. There are several different credit bureaus in the United States that lenders can report to; Equifax, Transunion and Experian are the three major credit bureaus. Most lenders report to all three credit bureaus.
These credit bureaus create a on every person who applies for credit, filed under your Social Security number; this file is called a credit report. Everyone who has ever borrowed money has a credit report. Some people who have never even borrowed money have a credit report, because occasionally bank accounts report to credit bureaus as well.

Information in a Credit File

Credit files contain several important pieces of information. First, they contain a list of all of the names you have ever applied for credit under, and several of your most recent addresses. This general information appears on every credit file.
Credit files also contain a record of money that you borrowed. The file shows how much unsecured credit you have available, and how much of it you have used. For example, if you have a credit card with a $10,000 limit, your credit report will state the name of the credit card and the fact that you have $10,000 in available credit. The credit report will also show how much of this credit you actually have used. So, if you borrowed $8,000, the credit file will report that your balance is $8,000 out of the available $10,000.
For secured loans, the credit bureau will show the amount you borrowed in total. So, if you borrowed $100,000 for a mortgage, the credit bureau will state that you borrowed $100,000. If you have paid off $10,000, the credit bureau will reflect that, and show your current balance at $90,000 out of a possible $100,000.

The credit file also shows a record of payments, and highlights payments that were 30 days late, 60 days late, or more than 60 days late.

The credit file shows whether there have been any judgments against you- for example if you lost a lawsuit- and whether you have ever declared bankruptcy.

Finally, the credit file shows everyone that has pulled your credit report ("inquired") about your credit worthiness for the past 2 years.

Credit Score

Perhaps the most important component of your credit file is your credit score. A credit score is determined by a complex formula that is not disclosed to the public. It is based on several factors. A credit score takes into account length of credit history; the longer you have been using credit, the better your credit score. A credit score also evaluates your debt-to-credit ratio. It is best to use less of your available credit, because a credit score declines if you borrow up to the limits of the amount of unsecured credit available to you. A credit score also considers your payment history; late payments will result in a lower score. Bankruptcies and liens or judgments also lower a credit score. Finally, too many inquiries can lower a credit score.
Negative information, such as a bankruptcy, can stay in a credit file for seven years, and will continue to lower your score for the duration of the time it is on your credit report.

Importance

Credit scores, and credit files, determine whether you will be able to borrow money and what the terms of the loans will be. An excellent credit score will allow you to qualify for more credit or for lower interest rates. This can save you thousands of dollars over the lifetime of car loans and mortgage loans.