What is a Credit Report?

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Definition:

A credit report is a document that contains information about your past and current interactions with credit and debt, such as your loan payment history and the status of your credit accounts.

🤔 Understanding credit reports

A credit report is a statement generated by a credit bureau – a business that collects, maintains, and sells consumers’ credit information. This report helps lenders and other companies determine how financially responsible you are before they enter into an agreement with you. It includes personal information; details about your previous and current interactions with credit and debt; any public records like bankruptcies; and inquiries that have been previously made on your credit. Credit bureaus use this information to generate a credit score for you. Credit scores are numerical representations of the risk of lending money to you. When lenders look at loan applications, they often ask a credit bureau to send them a copy of your credit report so they can use it to help them make their decision.

Example

One section of your credit report outlines all of your credit accounts, such as credit cards, mortgages, student loans, and auto loans. This account section details your payment history for each of these accounts. Every time you make a payment on, say, your student loan, the lender reports that payment to the credit bureaus. When you make your payment before or on the due date, it adds a positive note to your credit report and helps you to maintain or improve your credit score. If you are late on a payment or miss it entirely, the lender also reports that information and it stays on your credit report for seven years.

Takeaway

A credit report is kind of like the progress reports you got in elementary school…

When you were in elementary school, you often received a progress report that you had to take home to your parents every few months. It would outline not only your letter grades, but also include detailed information about how you were progressing in different subjects like math, reading, history, and art. Your credit report is like a progress report for how you have handled credit and debt. It includes detailed information on different aspects of how you’ve handled your debt, both recently and far in the past.

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What is a credit report?

A credit report is a document that tracks your interactions with debt (how much you owe) and credit (how much you can borrow). Companies called credit bureaus collect consumer information and compile these reports using information that they obtain both from public records and lenders, such as banks, credit card issuers, and auto finance companies. Some of the information that appears on your credit report includes your current account balances and history of making payments on your debts.

There are three major credit bureaus in the US today: Equifax, Experian, and TransUnion. Each credit bureau compiles its own credit report about an individual, so most people have multiple credit reports. However, they typically contain very similar, or even identical, information. Similarly, because there are multiple credit bureaus producing credit reports about you, your resulting credit score may differ slightly depending upon the company.

When you apply for a loan, most lenders will request a copy of your credit report from one or more of the credit bureaus. The lender then uses the report information to help make its lending decision. For example, a lender might decide to deny an applicant who has too many missed payments. It may also help the lender determine what interest rate they want to charge you for the loan.

Some non-lenders also make use of your credit report. Sometimes, insurance companies will look at your credit report when deciding the premium to charge you. Utility companies might also look at your report when you sign up for service. People with poor credit may have to provide an upfront deposit. Landlords may even review your credit report and credit score before deciding whether to rent an apartment to you.

How do credit reports work?

Credit reports work by tracking your interactions with credit and debt – typically supplied by lenders or obtained from public records – to build a detailed profile of your creditworthiness.

When you apply for a loan, most lenders buy a report from one or more of the top three credit bureaus (Equifax, Experian, and TransUnion). They then use this credit report to aid them in making a lending decision.

If you qualify for and accept a loan, the majority of lenders will report your loan activity to one or more credit bureaus each month. Typically for free, the lender provides information such as your current balance, how long you’ve had the account, and whether you made your payment before the due date. The credit bureaus then add this information to your credit report.

Certain actions show up on your credit report as negative information, and hurt your credit score and creditworthiness. For example, if you miss a loan payment or have an account go to collections (like late doctor’s or electric bill), that appears negatively on your report. On-time payments show up on the report as a mark in your favor.

What is included in a credit report?

Credit reports are typically broken down into four key sections, as follows below.

Personal information:

  • Your name (and any previous names)
  • Your address (and any previous addresses)
  • Your birthday
  • Your Social Security number
  • Your phone number(s)

Credit information:

  • Your current and previous loans and credit accounts
  • Each account’s credit limit
  • Each account’s balance
  • Each account’s payment history
  • Each account’s open and close date
  • The creditor for each account
  • Credit inquiries
  • Items in collections

Public records:

  • Bankruptcies
  • Foreclosures
  • Liens (aka a legal tool used to secure debt)
  • Civil judgments and suits

What is a credit score?

Each credit bureau uses the information on your credit report to calculate a credit score for you. Credit scores are numerical representations of your risk as a borrower. In general, lenders prefer to lend money to people with high scores because there is less of a risk that they will default (aka not pay).

One of the most popular types of credit score is the FICO score. It is widely used by lenders across the United States and was devised by the Fair Isaac Corporation.

Credit scores range from a low of 300 to a high of 850. Each credit bureau may produce a slightly different score for you because they have slightly different information on their report and use slightly different algorithms to generate the score. This means that most people have multiple credit scores – though often they are quite close to each other.

What determines your credit score?

There are five factors that determine your credit score. In order of weighted importance, they are:

  • Payment history - 35%
  • Amount owed - 30%
  • Length of credit history - 15%
  • New accounts - 10%
  • Credit mix - 10%

The most important factor in your credit score is your payment history. Every time you make a payment before or on its due date, it can help boost your score. However, even one late or missed payment can significantly damage your credit.

The amount that you owe also plays a major role in your credit score. Carrying a smaller balance and using a smaller portion of your credit card limits can help keep your credit score high.

What is a good credit score?

There are credit score ranges that lenders use to group people based on the risk of lending to them.

Though every lender is looking for a different type of borrower, generally they consider anyone with a credit score of 670 or above (on a scale of 300 to 850) to have good credit. The higher your score, the better it is because higher scores indicate lower borrowing risk. People with higher scores generally find it easier to qualify for loans and obtain lower interest rates.

Experian, one of the major credit bureaus, provides these ranges to help you determine where your credit score falls:

  • Very poor: 350 - 579
  • Fair: 580 - 669
  • Good: 670 - 739
  • Very good: 740 - 800
  • Excellent: 800-850

How do I improve my credit score?

If your credit score is low, there are a few things that you can do to improve your credit score.

One of the first things that you should do is check your credit report for errors. Sometimes, credit bureaus add someone else’s accounts to your report – This could be an individual with a similar name or ex-spouse. They may also accidentally report a missed or late payment that you actually made on time. Removing these errors can help.

Secondly, paying your bills by their due dates is the most important part of building good credit. Having a long history of on-time payments is the best way to build a good credit score.

Lastly, reducing your debt load can also boost your score. Try to reduce your outstanding debt and avoid maxing your credit cards to improve your score. According to the credit bureau Experian, it’s best to keep your credit utilization rate at no more than 30% of your total borrowing limit. And, people with excellent credit scores (above 800) tend to keep this utilization under 10%.

How do I get a credit report?

Federal law requires that each of the three major credit bureaus – Equifax, Experian, and TransUnion – offers consumers a free copy of their credit report once a year. You can request a copy of your credit report by filling out the Annual Credit Report Request Form and submitting it by mail.

You can also visit AnnualCreditReport.com to request a copy of your credit report. There are many fake sites that claim to offer free reports, so be careful about the one that you choose.

In some other scenarios, you can also get a free credit report. For example, you have 60 days from the day you received a loan denial due to information on your credit report to request a copy from the lender. Unemployed people, victims of identity theft, and those on welfare can also request copies of their report.

What is the best website to get a credit report for free?

AnnualCreditReport.com is the website authorized by the US government to give consumers their free credit reports. You can get one copy of your credit report from each of the three main credit bureaus – Equifax, Experian, and TransUnion – per year.

There are other websites that offer more frequent access to your credit report, but these sites do not have the same backing or authorization from the federal government and may charge fees.

Why is a credit report important?

Your credit report is important because it plays a major role in your ability to qualify for loans, whether that be auto, student, or home mortgages. People with good credit reports have a much easier time getting loans and credit cards. They may also pay a lower interest rate than people with bad credit.

Outside of lending, your credit report can impact your insurance rates and whether you have to provide an upfront deposit when signing up for things like utilities or a cell phone service. Landlords and even employers may check your credit when deciding whether to let you rent an apartment or give you a job offer. In general, having poor credit makes things more expensive.

What can happen if I get a bad credit report?

If you get a bad credit report, you may find yourself having trouble qualifying for loans, paying higher interest rates on debt, or even having difficulty finding somewhere to live or work. Many lenders use the information in your credit report to make lending decisions and will deny loans to people with poor credit. People with bad credit may have to resort to alternative lending like payday loans, which are expensive short-term loans aimed at people who need a small amount of cash to make it to their next payday.

Even if a lender does approve your application, you’ll typically have to pay higher interest rates and other fees based on your bad credit.

It’s also more difficult to repair a bad credit report than to build a good credit report from scratch. Negative information, such as missed payments or bankruptcies, stays on your credit report for years. As long as negative items remain on your report, they’ll damage your score and may give lenders pause when they consider your applications for loans.

Sometimes, a bad credit report can become self-reinforcing. If you have poor credit, you can have trouble qualifying for loans and each loan application you submit can drop your score by a few points. Poor credit also makes loans more costly, making it more difficult to meet your payment requirements.

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