Understanding Your Credit Report

Understanding Your Credit Report

By Kevin / April 21, 2015
Credit Score and Credit Report Explained

You probably have heard people reference their FICO score. If you are like most consumers, however, you may not know the the exact meaning of a FICO and it means to you. 

FICO is the brainchild of Bill Fair and Earl Isaac - two men who developed a methodology to evaluate the risk associated with making consumer loans. Together, they formed the Fair Isaac Corporation to provide credit ratings for analysis.

A registered trademark of the Fair Isaac Corp., the FICO score has been used by lenders to help evaluate consumer debt and loans - including credit card debt - since the 1970s. Your FICO score helps lenders decide the potential loss or risk factor before granting you credit.

But it is important to know that your credit score is just one part of your credit report. And it is determined by applying a formula/algorithm to the rest of the contents of your credit report.

This is why it is so important that you understand what goes into your credit report.

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What is Your Credit Score Used For?

Creditors use your credit scores to determine your risk as a borrower. Your credit risk tells potential creditors whether there's a good chance you'll pay off your credit card debt or make on-time payments on a new car loan.

Credit Score Ranges

730 - 850: Excellent Credit

700 - 730: Good Credit

650 - 700: Average Credit

600 - 650: Fair Credit

Under 600: Bad Credit

Creditors make many calculations based on your credit scores and information on your credit report. Your financial history is actually public record, and your financial information -- including payment history -- is located and condensed by three major credit bureaus: Equifax, TransUnion and Experian.

The data that these three companies accumulate becomes your credit report and it used to calculate your credit scores. It's important to realize that even a single piece of information can change your score and may mean the difference between getting approved for a credit card and getting rejected.

Since each bureau tracks information from somewhat different sources, your scores may differ slightly between the bureaus.

A high score indicates you are a great candidate for paying back loans on time, while a low score means you do not have a history of responsibly paying back debts.

The better your score, the more credit opportunities will be available. You also will end up with lower interest rates and costs. This is why having a strong credit report is so important to your financial health.

Your credit report includes identifying information (including your name, current/former addresses and employer), along with your credit and loan history, inquiries into your credit, collection records and public records, such as a tax lien or bankruptcy filing.

Each piece of your credit and loan history remains on your credit report for 7 years, and it includes details such as the credit limit, the date the account was established and the type of account.

Who Can View My Credit Report?

To understand the importance of your credit report, it's necessary to understand exactly who can access your report.

The list of organizations who can view your credit report includes:

  • You
  • Creditors
  • Government agencies
  • Insurance companies
  • Potential employers
  • Legitimate business contacts

Why Should I Check My Credit Report?

Think of your credit report as your financial resume. When you apply for a job, a home loan, a credit card or insurance, your report will be analyzed to determine how you compare to other consumers. Bad marks on your credit file can get you rejected for a job or credit -- or just keep you from getting the most favorable terms on a new loan or financial product.

So, whether you're planning to buy a home, get a new credit card or even get car insurance, there's one obstacle you need to clear: your credit report.

Your credit report contains your complete credit history, as reported by lenders to the three credit bureaus: Equifax, Experian and TransUnion. The information in your report is also used to generate your credit score. And your creditors will use your credit report to see how you've managed credit in the past and decide if you're a good risk.

It's easy to ignore your credit file and assume everything is correct -- or downplay potential red flags in your mind. The truth is, a single piece of information on your report may cost you your home loan, or get your credit card application rejected.

Frequently reviewing your own credit reports is vital for maintaining good credit and putting your best foot forward. After all, you're going to be judged based on the information it contains, so shouldn't you know what potential lenders and employers will see?

If you've been putting off reviewing your report, here are some major advantages you should keep in mind:

  • ​Look out for identity theft;
  • Detect signs of identity fraud before serious damage is done;
  • Fix errors in your report that may harm your chances to get a loan;
  • Track your progress in rebuilding or maintaining your credit;
  • Look for red flags to address before getting a loan or new credit;
  • Monitor co-signed loans to make sure the primary is paying as agreed; and
  • Learn how to improve your score by determining what's hurting your score and how to fix it.

Protect yourself from identity theft

Want to clean up your credit report?

When should I check my report?

If you've never checked your credit report, you should do so immediately. This isn't the only reason to check your credit file, though. You should review your report regularly to watch for signs of identity theft, and at least once a year to check for errors on your report that may be bringing down your score. Mistakes are actually very common!

You should also get in the habit of checking your credit report before making any major purchase that requires a loan -- such as buying a home or a car -- to check for problems you can fix beforehand. If you give yourself enough time, you can look through your report for issues that are bringing down your credit score. This includes a high debt-to-credit ratio (or the amount of your available credit you're using), which can be fixed by paying down the debt before you apply for the loan to get the best rates.

In order to be able to read and understand your credit report, you first need to what is contained in each section, and what to look out for.

How to Read Your Credit Report

Your report details the type of credit you use, how long your accounts have been open, whether or not you pay on time and more. It also tells lenders how much credit you're using and whether you've applied for new credit.

Records of previous and current accounts will show your payment history going back seven years, plus details like your credit limit, when the account was opened and the type of account.

Your credit report consists of these sections:

Table of Contents

The top of your credit report lists your name, the date, and a report number. This report number is important if you need to dispute any of the items on your credit report. A summary, or table of contents, is also included at the top of the report.

Your Creditors and Accounts

Next are two sections containing reported account information and items in the public record that are used to evaluate your credit history and utilization. These are “Potentially Negative Items” and your “Accounts in Good Standing”.

When reviewing these accounts, remember that not every creditor reports to all three bureaus. So if you are only looking at one credit report, or see a difference between credit reports, that may be why. But you should also double check to make sure all reported creditors listed are actually yours, and that the information is accurate.

Potentially Negative Items

The items in this section are ones that creditors may view less favorably. It also includes any negative public information, such as a bankruptcy or lien and judgment information obtained directly from the courts.

Accounts in Good Standing

Next comes a list of accounts that have a positive status and may be viewed favorably by creditors.

Included Account Information 

Both your Potentially Negative Items and Accounts in Good Standing will include:

  • The creditor’s name and address 
  • Your account number (shortened for security)
  • Your account status (open, closed, never late, past due)
  • The type of credit account (revolving or installment)
  • The date the account was open and last reported 
  • Your responsibility for the account (individual or joint)
  • Details of your payment history reported to the bureau – including late payments, charge-offs, your current balance, and how much you have paid back
  • Your Statement - if you dispute an item with the credit bureau but it has not been removed, this will be included

Revolving credit involves a credit line that can be accessed over time but does not have an associated end date or term. Credit cards are a common example of revolving credit. Installment accounts have a fixed length of time in which they must be repaid. Mortgages, car loans, and student loans are all examples of installment accounts.

Your Credit Inquiries

Requests for your credit history are logged on your report whenever anyone reviews your credit information. There are two types of inquiries.

  1. Inquiries viewed by others in connection with a transaction initiated by you. These include inquiries from your applications for credit, insurance, housing or other loans. They also include transfer of an account to a collection agency. Creditors may view these inquiries when evaluating your creditworthiness.
  2. Inquiries resulting from transactions you may not have initiated but that are allowed under law. These include creditrros who may want to make you preapproved offers, as well as for employment, investment review, account monitoring by existing creditors, and requests by you for your own report. These inquiries may only be made if in compliance with the Fair Credit Reporting Act. These items are shown only to you and have no impact on your creditworthiness or scores​.

Your Personal Information

The credit bureau also provides personal information associated with your history that has been reported to it by you, your creditors and other sources.

This section may include your name and Social Security number variations, employers, telephone numbers, and your known current and past addresses.

Although this section is often ignored, it is just as important to check the accuracy of this information. Erroneous personal information could be a sign of fraud or identity theft.​

Where Can I Check My Credit Report?

We recommend trying a service like FreeCreditClick, which offers a seven day free trial.

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Understanding Your Credit Score

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  • Check Your Credit Scores with Experian, TransUnion & Equifax
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* See offer terms and conditions on freecreditclick.com

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Many aspects of your daily life involve the information on your report, and you could be wasting money on higher interest rates and getting turned down for loans needlessly. How does your financial resume look? If you don't know, it's time to check your credit file to make sure it accurately reflects your financial situation -- and take steps to improve it further.

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