By Chris Potter - StockMonkeys Contributor
Credit reports are the primary tool, in addition to their corresponding credit scores, determining whether or not a consumer is trustworthy enough to receive credit from a lender. It is a summation of their credit worthiness and whether or not they've been financially responsible when making monthly payments and paying off loans. A big part of a credit report are accounts that are of the revolving credit type. This is the most common type of credit extended to consumers and will often make up a majority of the report.
The most ubiquitous type of revolving credit is a personal credit card. The term revolving means that it is an open line of credit as long as the borrower adheres to the credit card agreement and the terms and conditions there within. The terms are normally simple which are to make the monthly minimum payment on time for the correct amount without exceeding the credit limit. If this is done on a regular basis the consumer can continue to use the line of credit in perpetuity on a month-to-month basis. An example of something which is not revolving would be a mortgage or auto loan. These types of credit disburse a large fixed amount of money initially to pay for an item in full and then the borrower makes monthly payments until the loan is paid off. The borrowed amount does not adjust up or down as the consumer makes additional purchases and payments.
Due to the differences between a revolving line of credit and a loan their corresponding annual percentage rates and principle balances are paid off differently. A credit card normally has a minimum monthly payment amount of 2% of the outstanding balance. As the balance increases or decreases so does the monthly minimum payment. The interest accrued every month is calculated on an average daily balance and the interest rate is divided by 12 to get the monthly interest expense. A
loan, like the mortgage, uses an amortization schedule for payments which leads to more interest being paid for in the first few years and more principle being paid in the final few years. There are also different fees for revolving lines of credit such as over the limit fees and late payment fees which don't normally apply to mortgages and auto loans in the same frequency.
When it comes to credit reports. revolving lines of credit have the largest percentage impact as they are the most common forms of credit and the most prone to abuse. There are three key aspects where revolving lines of credit affect the majority of a credit score. The first is total debt which is relevant because revolving lines of credit can drastically increase if the consumer goes on a buying spree. The second is called the credit utilization ratio which is the amount of available credit in relation to the amount of credit already used. The third is consistent monthly payments made for the correct amount and on time. Mortgages and auto loans tend to hold more weight in consumers minds but they are protected against default by the underlying asset. Revolving lines of credit however, because of their unsecured nature, are weighted heavier because of the ease at which they can spiral out of control and force a consumer into bankruptcy.
Federal law allows consumers to request one free credit report from each of the three credit reporting bureaus once every 12 months. To obtain your free credit report go to www.annualcreditreport.com and print out a copy for your records. It is important to check the accuracy of all information as any black marks or negative comments can significantly impact your ability to acquire future credit and may result in higher interest rates. Obtaining a copy of your free credit report also allows consumers to protect against identity theft or suspicious activity while keeping an eye on items like revolving lines of credit.