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How to Read a Credit Report

A credit report contains a wealth of information on your current outstanding debt, as well as on your employment, bill payment, and loan history. The report also shows your personal information, including places of residence. Credit reports also indicate if you have filed for bankruptcy and might show if you have been arrested or sued.

Your credit report and score contribute to the information lenders use to decide if you can obtain loans and debt-related products such as credit cards. Landlords also use them to screen tenants, and some employers consult them when they make hiring decisions.

You’ll be in better financial shape once you know how to interpret and correct the information that appears on your credit report. Once you know how lenders use credit scores, you’ll be way ahead of the game.

Why It’s Important to Understand What’s Behind the Number

Good credit is an important aspect of your financial well-being. A periodic review of your credit report allows you to examine your credit score and find possible errors.

Regularly reviewing your credit report could alert you to potential identity theft. Every 12 months, you can order a free credit report which contains your free credit score from the three major credit agencies: Experian, TransUnion, and Equifax.

Lenders generally look at your Fair Isaac Corporation (FICO) score. Founded in 1956, FICO was the first company to offer a credit-risk model with a numerical score. This model continues to be used by the major credit companies to determine your creditworthiness.

The FICO score ranges from 300 to 850, although lenders use several different scores for different financial products. Lenders often use different credit scoring formulas, as well as information from different credit reporting sources.

For example, your home loan score might differ from your credit card score, while your online purchases could produce a different score from the previous two. Because lenders look at different reports, you may qualify for lower interest rates depending on what scores the lender considers, so it would be wise to shop around when looking for a loan.  

Furthermore, you want to only apply for credit that you need, since your recent credit activity indicates to a lender what your credit needs might be. If you apply for a lot of credit within a short time span, a lender might interpret that to reflect a deteriorating economic situation, which may also adversely affect your credit score.

An example of a credit report requested by a tenant screening service from Experian can be seen below:

This particular report shows two revolving charge accounts and one credit card account, each with low limits, and that the individual only borrowed small amounts.

The result of the report is a credit score of 300 – 499, which indicates bad credit despite no delinquencies. Most lenders and landlords would avoid a person like this since he does not have much of a credit history.

What You Need to Understand on Your Credit Report

Your credit report consists of a number of components:

Component 1: Your Personal Information

Personal items that appear on your credit report usually include your:

  • Legal name(s) and aliases
  • Address(es)
  • Phone number(s)
  • Birthdate
  • Social Security number: Credit agencies often obscure this number in reports unrelated to employment or taxation where you would have disclosed it.

Component 2: Your Employment History

Information about the jobs you held may be included in your credit report. If you find inaccuracies, you can file a dispute to change the information on the report.

Employment data that appears on a credit report can often be used to verify your identity.

Component 3: Credit Inquiries

This section highlights the legitimate businesses, such as banks, credit agencies or landlords, that have made inquiries into your credit status.

When you apply for credit by making a bank loan or credit card application, for example, the potential lender conducts what is known as a hard inquiry. Credit checks not made by prospective lenders are called soft inquiries

Component 4: Credit-Related Accounts

Your outstanding credit accounts or trade lines usually make up the bulk of your credit report. In general, the more accounts you have in good standing, the higher your credit score will be. As long as your accounts remain in good standing and all payments were made in a timely manner, your credit score should be higher.

Credit scores are based on your behavior over time, so the longer you display good credit behavior with a lender, the more your score will improve. If you have multiple accounts, it’s important to make timely payments on all of them. Outstanding balances should also remain small in relation to your accounts’ credit limits.

Furthermore, closing and opening different accounts may affect your overall credit score. For example, if you consolidate all of your credit card accounts into one account, this could adversely impact your credit score, especially if you end up using a large percentage of your total credit card limit. Also, the frequent opening and closing of accounts, as well as the transfer of significant balances, can damage your credit score.

What To Do About Inaccuracies

Mistakes and inaccuracies in your credit report can adversely affect your credit history and current credit score. Your personal information (name, address or phone number) could contain mistakes.

Accounts, loans or credit cards might not belong to you or could have been created through identity theft. Erroneous reports of delinquent or late payments could also appear.

Closed accounts could also be listed incorrectly as open, or an unpaid debt could be listed more than once. Once you have found an inaccuracy, you can contact both the creditor that provided the information and the credit reporting company to have your credit record corrected.

If you decide to do this, explain to them what you think is wrong and your reasons. Make sure to include copies of any documentation that supports your side of the issue. Most credit reports come with a section on how to dispute mistakes.  

Final Thoughts

You might need a high credit score to facilitate future loans and obtain more credit. Raising your credit score involves paying your bills on time, every time, which can be done by setting up automatic payments with your bank.

If you have any missed payments, make sure you pay them as soon as possible and continue to keep up. Most negative items stay on your credit report for seven years, although bankruptcies remain on your report for 10 years.

Credit scoring models also tend to look at how close you are to your credit limit, and a red flag goes up if you exceed or get too close to your credit limit. An almost-maxed out account can also hurt your credit rating, so make an effort to keep your debt balances low in proportion to your overall credit limit.

With respect to your FICO number, lenders in the United States tend to turn down people with a credit score below 599. Those with poor and bad credit (300-599) are unlikely to get approved for a significant loan.

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