How to read your credit report

Credit Score (photo credit: Creative Commons www.cafecredit.com)

Many financial websites and professionals recommend checking your credit report every year as one of the best ways to live a healthy financial life, yet no one tells you what to look for. It’s like asking for a blood test without knowing how to interpret the results. You know it’s a good idea to check, but you probably aren’t quite sure where to start. Let’s dive into the specifics of how to evaluate your credit report.

Understand your credit score

Your credit score has a big impact on your ability to qualify for various types of loans, such as a mortgage, credit card, or car loan. Even if you are approved for one of these, a better credit score (or FICO score) can lead to increased lending amounts at better financing terms. Before taking out any sort of loan, it’s a great idea to review a copy of your credit report so you are aware of what your potential lender will see. This may also help you decide if you need to delay applying for credit if there are items on your report that need correcting, or appear in error.

There are three credit bureaus: Experian, TransUnion, and Equifax. They each have different methods of calculating your FICO score, but in theory, all the information on the reports should be consistent. Some businesses, however, do not report to all three credit bureaus so it is possible to find discrepancies. Your score is made up of 5 different components. These include payment history (35%), the amount you owe (30%), the length of established credit history (15%), new credit accounts and inquiries (10%) and the types of credit you use, such as credit cards, mortgages, and bank loans (10%).

Although your score tends to be the focal point, it is just as important to know how to read the full report, as any errors can have a negative impact on your credit terms. Most credit reports come with a glossary to help you understand what you are looking at, but let’s examine the different sections you will find:

1. Personal Information

This section includes your name, address, date of birth, Social Security number, current and previous addresses, and employer information. You may see your name in multiple forms if you have changed your last name due to marriage, or used nicknames in the past. Although this information has no bearing on your credit score, it’s important to make sure all this data is correct as any misspellings or errors may lead to inaccurate reporting.

2. Credit Accounts

Here you will find a history for all the types of credit you have had. In general, there are three different types of credit accounts: mortgage accounts, revolving credit (usually credit cards), and installment accounts (those with fixed or predetermined number of payments).

Each account will list, among other things, the name of the lender, the date you opened the account, the original amount and current balance, and payment history. If an account is no longer open, you will see that marked as either a “closed” account, “collection” account, or “charged off,” meaning the creditor is no longer making an effort to collect the debt.

Late payments and delinquent accounts are generally noted by numbers or an abbreviation code and appear in calendar form with each box representing a monthly payment. If all your payments are made in timely manner, you will see “OK” inside each box, however, if you have made late payments, this is usually indicated by a “30”, “60”, or “90” signifying how late your payment was. A late payment will remain on your credit report for seven years; if there are any inaccuracies it’s crucial to have the error fixed so your score is calculated accurately.

3. Public Records

Hopefully this section is blank, but here you will find any public records from federal, state and county courts as well as information from collection agencies. Types of information that appear include foreclosures, bankruptcies, financially related civil lawsuits, wage attachments, and tax liens. Negative public records can have a drastic effect on your credit score and can lead to many lenders denying your application for credit. Although most public records will last seven years on your report, some may remain for extended periods, such as an unpaid tax lien which may never be removed.

4. Inquiries

The last section will show any organization or company that has requested to see your credit report. This can include a credit card company when you submit an application or a bank when you apply for a mortgage.

There are two types of inquiries: hard and soft. Soft inquiries come from a company that may want to prescreen you for potential credit offers or even potential employers who are conducting background checks. Soft inquiries have no effect on your credit score since they are generally initiated without your permission.

Hard inquiries, however, occur when you apply for new credit. Hard inquiries have the potential to lower your score by a few points, as a large number of credit applications can be a red flag to potential lenders. Hard inquiries may show on your report for up to 2 years.

Understanding your credit report will help you stay informed and prepare accordingly when you complete an application for any kind of credit. If you know your score, you can anticipate the interest rate you may receive when you apply for a mortgage or loan. Taking time to review your credit report every year to ensure its accuracy is one of the best ways to live a healthy financial life.

Image Credit: Photo by CafeCredit under CC 2.0

Eric Dunner, J.D., CFP®
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