There are five factors that go into calculating the credit score. These five factors are your payment history, credit utilization, length of credit history, new credit, and your credit mix or the variety of credit that you use. Plenty of factors also come into those five factors like how often you pay credit and often you apply for new credit.
In the same way, there are also plenty of factors that you might think are a part of the factors that affect your credit score and might show up on your credit report but really don’t.
Some of the factors that are left out of the score should have an impact on the score because credit scores alone do not have comprehensive information about your money situation. While credit reports include the status of accounts from certain lenders as well as information about their delinquencies and several credit inquiries, detail about assets, cash flow, and even some debts are missing.
Experts argue that lenders may make unfair decisions that limit access to credit or may even give unfair terms for debt that they can’t afford to pay because of the lack of certain information.
To put it simply, credit scores as they are now doesn’t paint the full picture of a person’s finances.
Below are four missing pieces of information from your credit report that could paint a clearer picture of your overall financial situation, according to experts.
Over-all Cash Flow
Your cash flow, or how money goes in and out of your account, could be a strong indication of your ability to pay for a debt or a loan. It paints a picture of financial obligations, spending habits, as well as the amount of cash you have readily-available after the fulfillment of your other obligations.
By looking at a person’s cash flow for, let’s say, a year, a lender might be able to see if the borrower can afford to make payments for that specific loan on a monthly basis. Those with limited credit histories may be able to benefit from this since more information is available to the lender.
Assets
In 2015, about 45 million people in the U.S. had little-to-no credit history according to the Consumer Financial Protection Bureau. A small chunk of these people have no credit history at all, while the large chunk reportedly had very little information to provide for a credit score.
In order to compensate for the thin files, assets could be accounted in credit reports to provide lenders with an understanding of how these people manage their resources – bank accounts, retirement funds, or properties.
Complete Debt Record
A credit report includes information that can date back to no more than 10 years. However, it only lists accounts from businesses that are registered to report to credit bureaus. That means that a big chunk of debt from non-registered credit bureaus was left unreported. It also does not cover other forms of debt, such as medical bills that have been left unpaid for 180 days and 401(k) loans. Providing a complete record of all the debt could go a long way, even if it results to restricted access to credit for some consumers.
All of that information could be used to paint a better picture of the financial situation. Having unpaid medical bills could mean the lack of capacity to repay the bills at that time. Since it doesn’t show up on the credit report, lenders are able to extend credit beyond what could be reasonably repaid.
Although being denied credit can cause short-term financial pain, it may ultimately help people improve their money situation in the long run.
Seller-financed Real Estate Payments
Successfully paid-off mortgages can place a positive impact on your credit score as these closed accounts can stay on your credit report for a decade. However, obtaining financing through the seller and not with a traditional lender won’t be able to receive that benefit.
In the wake of the recession, mortgage-lending regulations tightened. New homeowners turned to alternative financing methods to finance their homes. They turned to seller-financing. However, land contracts or offers to buy don’t really show up on a credit report. Timely payments on these homes don’t get reported and can’t help build good credit.
The same can also be said for other payment plans, such as automobile purchases and personal loans that have been made between individuals that circumvent a traditional lending agency.