What is a Credit Report?
What's in a credit report? A lot, actually. Here's what you need to know about credit reports.
Definition of a Credit Report
A credit report is a document used by lenders and other financial professionals that gives them a glimpse into a borrower's credit history. Your credit report has many factors and contains a lot of information about your financial life. This includes current and past lines of credit, credit cards, and loans.
A credit report is a snapshot of your financial life at any given point, and its purpose is to allow lenders to see how you handle debt. This allows them to make decisions about extending credit to you based on your own situation and how you've handled credit in the past.
Why Credit Reports Matter
Your credit report matters because it's a valuable tool that you can use as well. Knowing what is on your credit reports allows you to take control of your financial freedoms and not be afraid of what the lenders will find there.
The information in your credit report determines your credit score, which, as you may know, is very important when taking on a loan – the better your credit score, the better terms and rates you're likely to get when financing.
Key Components of a Credit Report
Personal Information
Personal information in your credit reports includes any names you've used in conjunction with credit, including nicknames, current and past addresses, your birth date, social security number, and any phone numbers associated with you.
Credit Accounts
All your current and past credit accounts are listed here, with a seven to 10-year history for closed accounts. Information about each account includes the credit limit, or amount of your loan, account balance, payment history, the date the account was opened and/or closed, and the name of the creditor or lender. The accounts listed include all credit cards, loans, mortgages, and lines of credit you have, no matter the type.
Payment History
Your payment history is the most important part of your credit reports because it shows whether or not you make your payments on time and in full. This is what lenders are concerned with when it comes to extending you credit. They may be hesitant to offer you money if you don't have a solid payment history, fearing you won't meet your payment obligations. Payment history isn't a separate category on your credit report, though, and you will find this information listed for each account in your credit accounts list.
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Credit Inquiries
This section of your credit report details anyone looking at your credit, and what that inquiry was for. Lenders will pull your credit to see if you are a good candidate for a loan or a line of credit.
Inquiries you make to monitor your own credit are not shown, and they don't impact your credit score the same way a lender looking at your credit does – they're considered a soft inquiry.
The inquiries made by lenders are called hard inquiries, and only a hard inquiry from a lender will affect your credit score, usually dropping your score by no more than 5 points per inquiry.
Public Records
Public records that have anything to do with your finances are included in your credit reports as well. This includes judgments against you, liens, bankruptcies, and foreclosures.
Collections
Collections are a big part of your credit reports. Any time something goes to collections, it is listed on your credit reports, and typically stays there for seven years, even if you eventually pay off the bad debt.
Any change in the account is also reflected, so even if something is sent to collections and then paid off, it will reflect in your credit report. The less you have in collections, the better.
How To Get A Credit Report?
Because it's important to stay on top of your financial health, the national credit bureaus allow you to get a free copy of your credit report each week by visiting annualcreditreport.com, which is the government-sponsored website for all your credit information.
This is the place to go for a copy of your credit report from each of the three national credit bureaus – Experian, TransUnion, and Equifax.
You can also order a copy of your credit report from each bureau directly, but this typically costs a flat fee or means signing up for a membership at the credit bureau's website.
Monitoring your credit reports throughout the year is important, and it's recommended that you check your reports at least every three to four months. This allows you to ensure that the correct information is being reported and allows you to catch and correct mistakes if there are any.
Maintaining a Healthy Credit Report
How to Build a Strong Credit Report
Building a strong credit report means taking care of your finances, paying your bills on time, keeping accounts out of collections, and not having an over-reliance on credit. When it comes to a healthy credit report, you want it to help you build the best credit score possible. Your credit score is a direct reflection of the information in your credit report, so pay attention to the factors that go into your credit score.
These factors are payment history, amounts owed, length of credit history, credit mix, and new credit. Each of these has a different weight in determining your credit score, with payment history and amounts owed making up the majority of your score. These are responsible for 35% and 30% of your score, respectively, and together factor into 65% of your overall credit score.
Therefore, maintaining a healthy payment history is a must. This means paying all your bills on time and in full. Additionally, your credit utilization, or how much of your available credit you're using, should also be kept to a minimum.
Lenders don't like to see people who constantly max out their credit and continue to carry a high balance.
To combat this, ensure you're only putting on a credit card what you can afford to pay for in cash. If you can't pay your total card balance off each month and only pay the minimum due, you will incur interest charges, which can slowly drive up your balance, leaving you with little wiggle room in your financial life.
Also, make sure you only apply for credit when you truly need it. Having too many lenders check your credit too often can be a huge red flag.
How to Repair a Damaged Credit Report
Repairing a damaged credit report is possible, but it takes time and better financial habits than those that damaged your credit report in the first place.
If the damage is multiple collection accounts, charge-off accounts, or late payments, start by paying off the oldest balance you can manage, because the longer a collection account sits on your credit report, the less favorably your credit is viewed. Then, take steps to pay off your balances, starting with the smallest one. It's better to take on things in manageable chunks than to attempt to pay off large amounts of debt when you may already be in over your head.
If the damage is coming from incorrect reporting, such as a paid-off account still showing that you owe money, you can contact the reporting credit bureau and file a request to remove the information or to have them correct any issues you find by disputing errors on your credit reports. Simply provide proof of your account being paid in full, and the credit bureau should be able to amend your report within 30 days.
The Importance of Monitoring Your Credit Report Regularly
As we've already pointed out, monitoring your credit reports for your financial health is important. However, it's also important to monitor your credit reports for things that shouldn't be there. This is a big part of how to catch identity theft and lessen its impact on your life if you do fall victim.
By monitoring your reports for suspicious activity and knowing what should and shouldn't be in your credit reports, you can take steps to protect yourself. To do this, you can sign up for credit monitoring services or just use the annualcreditreport.com site to make sure you're up to speed on your reports.
Frequently Asked Questions (FAQs)
What is the Difference Between a Credit Report and a Credit Score?
A credit score is based on the factors in your credit report. Five factors make up your credit score, and all of the information in your credit report is given weight to build your score. The better your credit report looks, the healthier your finances, the better the credit score you're likely to have.
How Long Does Negative Information Stay on Your Credit Report?
Negative information generally stays on your credit report for 7 to 10 years, but it depends on the type of credit or the type of debt that remains as to how long it sticks around.
Can I Get a Loan with No Credit History?
There are many ways to get a loan with no credit history, including credit builder loans. The important thing is that you start with good financial habits and don't take on a loan that you ultimately can't afford.
Do Credit Reports Hurt Your Score?
Depending on the information on your credit reports, it could help or hurt your score. Your credit score is built by giving weight to different features of your credit reports, such as your payment history and the mix of credit cards, mortgages, and car loans you have showing on your profile.
