Knowing how to read and understand your credit report is crucial because the information it contains plays a significant role in determining your credit score.
A good credit score can make it easier for you to secure financing for big purchases like a new car, a mortgage, or a credit card. Therefore, it’s wise to familiarize yourself with the different types of information that appear on your credit report.
Understanding your credit report can help you identify the problem areas and improve them if you have bad credit. As the negative items on your credit report are replaced with positive ones, you’ll notice your credit scores begin to increase.
The Three Major Credit Reporting Agencies
Equifax, Experian, and TransUnion are the largest and most trusted credit reporting agencies, aka credit bureaus, in the nation. Each credit bureaus issues separate credit reports.
The majority of lenders use at least one, if not all, of them to check your credit history. While each credit bureau has subtle differences in how they report, most of the information on their credit reports is similar.
Each credit bureau’s credit report structure has several key categories of information that are deemed either positive, negative, or neutral.
These categories include your account summary information, account history, credit inquiries, public records, and consumer statements. Let’s look at each one so you know how to read a credit report, and more importantly, how to use it to your benefit.
How can you access your credit report?
Before you learn how to read a credit report, you first have to get a copy of it. You are entitled to a free credit report every 12 months. The quickest and easiest way to get your free credit report is to visit AnnualCreditReport.com. It’s the only website that the three major credit bureaus run.
Once you’re on the site, start by entering some basic information about yourself. You’ll then have to go through a separate identity verification process for each credit bureau.
If you’d like, you can begin by requesting just one or two credit reports and saving the others for later. This could be helpful if you want to track how the information on your credit report is changing over time.
Applying for a Loan?
But if you’re about to apply for a large loan, you might want to check all three credit reports at once to ensure your information is accurate and up to date.
Another consideration when you’re about to apply for new credit is the length of dispute time. When you get your credit report for free, the credit bureaus can take up to 45 days for an investigation. So if you’re in a hurry, consider purchasing your credit reports because they only have 30 days to respond to disputes.
Confirming Your Identity
To request your credit report, you will need to answer a series of personal questions that only you should know the answer to. These questions may include confirming your previous legal names and addresses, as well as financial questions such as the credit cards you have and when certain accounts were opened. Once you have completed this process, you can immediately view and download your credit report.
If, for some reason, you don’t answer the questions correctly, you have the option to print out a form and request a copy of your credit report via regular mail. You can also use this option if you prefer paper copies over digital copies.
What information is on your credit report?
Now that you know how to get your credit reports from Equifax, Experian, and TransUnion, let’s take a look at the information you’ll find there. Some of it is basic and easy to understand, while other parts require a little more analysis. The good thing is, you only need to learn this information once.
After you figure it out, you’ll be able to quickly review your credit report and understand what is being reported with little effort going forward. This information can help you improve your credit score and contribute to making better informed financial decisions in the future. Reviewing your credit reports regularly will also allow you to recognize signs of potential identity theft.
This basic section of your credit report is easy to understand, but you’ll still want to check the details carefully for accuracy and consistency.
Here you’ll see information including your name, former legal names, current and past addresses, date of birth, Social Security number. It will also have your current and previous employers, spouse information, and whether it’s a joint account report or not.
You may or may not have a lot of information in this section, depending on how often you’ve applied for credit.
For example, your employer doesn’t report any information about you, and this section isn’t meant to serve as a resume. Instead, a lender may report your employment information from a loan application you’ve submitted.
Personal information doesn’t affect your credit score. It is only used to verify your identity when needed. Check to ensure everything is accurate, but don’t stress, especially if you see something like a past job is missing.
Here you’ll find a summary of all of your debts and where you stand with each of them. For example, if you have a mortgage, you’ll see your balance, the original loan amount, and how many total balances you have.
You’ll see your total balance owed for all cards, as well as how much credit you currently have available. You’ll also see your credit limits, debt to credit ratio, monthly payment amount, and the number of credit accounts with a balance.
Depending on when the credit report is generated, you may still see a credit card balance even if you pay off all your cards in full each month. This is because credit reports are a snapshot of your credit history at a specific point in time.
If the report is pulled after a billing cycle has ended, but before you have made your payment, then the full balance will be displayed. Therefore, it’s possible to have a balance shown on your credit history even if you pay your cards in full on a regular basis.
To avoid this from happening, consider paying your credit card bill bi-weekly or even weekly. That way, you never have more than one or two weeks worth of charges listed on your credit report. Alternatively, if you reserve your credit card usage for major purchases, pay it off as quickly as possible rather than waiting until your next statement’s due date.
If you’re in the process of applying for a loan, you may need to improve your credit score or lower your debt to income ratio to meet eligibility requirements. You can ask your lender to perform a rapid rescore once you’ve settled your account balances to help you qualify for the loan.
A rapid rescore updates your credit report with the most recent information within a few business days, rather than the typical one to two months.
Depending on the length of your credit history, this section can be pretty long, but it’s also extremely important. So don’t let the length deter you from reviewing these entries with a fine-tooth comb.
Why? Your account history shows years of individual payments you’ve made month-by-month on each of your credit accounts, from loans to credit cards.
And your payment history accounts for 35% of your credit score, which is the largest contributing factor. So, you must perform your due diligence and ensure everything is accurate in this section.
The following information can be found under the account history section of your credit report. The details may differ among the three major credit bureaus, but the overall concept is the same for each one.
First, you’ll see an entry for each of your current open accounts. Perhaps the most significant piece of information here is the current payment status. Ideally, you’ll want the payment status to be “Pays As Agreed” because it means that you’re up-to-date on all of your payments.
However, depending on your payment history, you might see codes indicating any of the following:
- the account is now current but was 30, 60, 90, or 120 days past-due at some point
- the account is now current but was previously in collections
- it’s currently in collections
- it had a paid collection
- or it is a charged off account
There are many other possibilities, so look for a chart with explanations of the code given if you’re unsure what your specific payment status indicates.
Type of Account & Payment History
Each account also has an overview with information such as the type of account, highest credit limit, term duration, date opened, current balance, scheduled payment amount, and actual payment amount.
From there, you’ll see a month-by-month listing of your payment history on the loan or credit card. The credit bureaus categorize each account as Open, Negative, or Closed.
Most negative accounts generally fall off of your credit reports after seven to ten years. However, closed accounts in good standing can remain on your credit reports indefinitely.
A credit inquiry refers to an entry on your credit report indicating you have applied for new credit, insurance, or financing. Each of these actions triggers a company to pull your credit, and your credit score then dips a few points every time.
If you have just one or two hard inquiries listed, it will not have a major effect on your credit score. However, if you have several inquiries listed, the damage could really start to add up.
Additionally, too many inquiries may make it appear as though you are urgently seeking credit and could potentially discourage potential lenders. Therefore, it’s wise to be careful with the amount of credit card and loan applications you submit.
When shopping for the best rates on installment loans, such as auto loans, you may be given some leniency with regard to the effect credit inquiries have on your credit score. If you apply with multiple lenders within a short period of time, typically a few weeks, the hard inquiries will typically only count as a single credit check for the purpose of calculating your credit score. This means that you can compare offers from different lenders without worrying about the impact on your credit score.
Hard inquiries fall off your credit reports after two years, and typically only impact your credit score for one year. Still, check for accuracy in this section. In the instance you find an inquiry for a loan product you don’t remember applying for, you can lobby to have the item removed from your credit report.
You will also see soft credit inquiries listed in your credit reports. Soft inquiries don’t affect your credit scores at all.
You should recognize any information contained in the consumer statement section because it comes directly from you. Whenever you file a dispute with one of the credit bureaus, and the subsequent investigation doesn’t resolve anything, you may submit a statement explaining your side of the situation.
Typically, you’re allowed 100 words. This gives you the chance to provide lenders with additional information. However, do not overdo it with consumer statements. Too many can raise a red flag even if you feel like the case (or cases) didn’t end fairly.
Any items listed in the public records section of your credit report will significantly impact your credit score. They typically remain on your credit report for a period of seven to ten years. So make sure that all the information here is correct. Otherwise, you’ll have unnecessary damage done to your credit history.
What information ISN’T on your credit report?
One of the most important things to realize about your credit report is that it does NOT contain your credit score.
It is your right and responsibility to review and potentially dispute any incorrect information on your credit reports. However, credit scores typically need to be purchased separately, although you can sometimes view yours for free through a promotion from one of your credit cards or bank accounts.
Your FICO Score
The FICO score is the most common credit scoring model used by lenders. But, Experian, TransUnion, and Equifax have created an increasingly popular credit scoring model called the VantageScore to compete with FICO.
The most recent version of this is VantageScore 3.0. Many websites offer free educational credit scores, but the algorithms aren’t the same as the mainstream models. For this reason, the credit scores can vary greatly from the one your lender actually uses.
Remember that your credit reports directly affects your credit score, but the two are separate items. To get a better understanding of your credit situation, start by reviewing your credit report to ensure that all the information it contains is accurate.
Once you understand the contents of your credit report, you may want to consider purchasing your credit score to see where you stand. Taking this step will help you determine what factors are impacting your credit score positively and negatively, and which areas you need to improve.