How To Analyze Your Debt and Credit Reports

by : Peter Kenny

Most consumers realize that there is a relationship between their debt and their credit reports. The truth is there are several relationships between a consumer's debt and his or her credit reports and ultimately the credit score that is calculated using the credit reports. Knowing more about how these issues relate to each other can be an important part in keeping credit scores high.

First, it should be understood that not all debt has to be recorded on credit reports. If, for instance, you borrowed money from a family member or friend and made a private agreement to pay it back, that debt is more than likely not on your report. The same may be true if you pay a merchant on what is commonly known as a tab. Many consumers simply assume that the credit reporting agencies know everything and that is not exactly true.

Consumers should understand, however, that the credit reporting agencies do know a lot about your current and past credit. Some might argue that they know too much. A legitimate argument could be made on that front.

In general, a credit report will contain information on the debt that you currently owe. This will include your credit card debt, home mortgage debt, personal debts that were taken out through banks and credit unions, and auto loans. It will also include a summary of how much you earn. The amount of debt that you currently have when compared to the amount of income that you currently have is used to determine your debt-to-income ratio. This is a number that lenders often use when they are deciding whether or not to extend you credit.

Each lender will determine what the cut off number is for debt-to-income which makes it impossible for a consumer to know exactly what the upper level is for any particular loan. You can ask a particular lender what their cut off is but do not be surprised if they refuse to tell you. For some reason, lenders like to keep this number a secret.

Another reason you may find it difficult getting this number is that this debt-to-income number is just one of many factors that lenders use when determining creditworthiness of a consumer. That leads to this.

Credit reports will also contain information on how well and timely you have paid your bills. As important to some lenders, and more important to other lenders, is how well you pay your bills. Your credit reports will have this information, including information on late payments and any actions that lenders had to take in order to get their money. It almost goes without saying that the later a bill was paid the more negative it looks to future lenders. This is also used when computing overall credit scores. A couple of late payments in the past may not have much effect on your score, but several late payments will certain raise eyebrows.

On a more positive note, debt that you have paid off in the past will also be a part of the credit report. One of the best ways to know exactly what is on your reports is to order a copy from each of the major reporting agencies. You can do this online.