A personal credit report is essentially a guidebook that gives lenders all of the information they need about you. It details the financial history of both your open and closed credit accounts. There are many factors a creditor will look at on your credit report before deciding rather or not to offer you credit. Payment history, debt to credit ratio, age of accounts, types of accounts, and credit inquiries are all items in your personal credit report that are evaluated by lenders. There are also three major bureaus that make credit reports. They are Equifax, Experian, and Transunion. While these three reports are rarely the same they serve the same purpose for a lender. Basically, the credit report tells a lender how risky of a customer you are by giving them a number called a credit score. Here is a guide toward understanding how personal credit reports work.
What is in Your Credit Report?
A credit report includes several bits of information about you. There is some basic personal information including your address history and your employer. While these don’t impact your credit score, some lenders may use it to see if you move a lot or have steady employment history. Demographic information can be updated by writing to the three major credit bureaus.
Your credit report will list all of your positive accounts. This includes credit cards, loans, and store accounts. It will give you the date the account was opened, the current balance, the original balance, the monthly payment, and detailed payment history. Just because an account is positive does not mean it doesn’t hurt your score. Debt to credit ratio is just as important as payment history. If you have a credit card with a high balance it will hurt your score even if you pay on time every month. The same applies for a loan.
After your positive accounts, a credit report lists your negative accounts. This includes accounts that are charged off, delinquent, or in collections. These accounts are all hurting your score. How a negative account is reported is up to the creditor. If you have one late payment, some creditors may choose to not report that to the bureaus. However others will report that moment your payment is late.
The last section on the credit report is your inquiries. A credit report will list inquiries in up to three categories. Inquiries initiated by you are the only ones that impact your credit score. These occur when you apply for a new loan or credit card. The other categories are promotional inquiries and account evaluations. Account evaluations are done by companies where you already have an account. An example would be your credit card company looking at your account before offering a credit limit increase.
Accounts you won’t see on your credit report include bank accounts, utilities, and prepaid accounts. Bank accounts will only show up on your credit report if you overdraft the account and it is sent to collections. Utilities do check your credit in some cases but rarely report.
How to Get Your Credit Report
The US government allows you to obtain one free copy of your credit report each year from each of the three credit bureaus. However, there are other ways to get a free copy of your credit report. If you were denied credit or employment you are entitled to a free copy of your report for up to sixty days. You may also be able to get a copy of your report if you are unemployed or on welfare. The other way to obtain a free copy of the report is if you feel you are the victim of identity theft. Additionally, many websites let you buy the report. You have to pay for your credit score no matter what but only a few places offer accurate scores.
Once you get your credit report it is important to scan for errors. Over 75% of credit reports contain errors. About 20% of those lead to people being denied credit. When you get your report check for accounts and make sure your payments and balances are correct. If you have a negative item that is misreported or too old to appear on the report note that as well. Negative items can only remain on a credit report for up to seven and a half years. Judgments and bankruptcies can remain for ten years. Inquiries remain for two years. Disputes can be carried out with all three bureaus online or through the mail.
Understanding What Lenders Evaluate
Your credit score is basically a formula. About 35% of the score is made up from your payment history. Any late payment will hurt that score. The more recent the late payment the worse it is. 30% of the score comes from your debt to credit ratio. While installment loans have an impact on this, the big factor here is your revolving credit. That is why it is vital to keep your credit card balances as low as possible. The rest of your score is made up of the age of your credit history, the number of inquiries, and the variety of accounts.
Lenders take other things in to consideration as well including your income, employment history, and other factors. But the credit report is the fundamental tool they use. It is important to understand what is in the report and how it is used. Debt to credit ratio is the easiest thing to fix. While a late payment can’t be erased without good will from the creditor, you can lower your debt to credit ratio by paying down your credit cards. Different creditors report to bureaus on different days. It is a good idea to contact your creditor to find out what day they report and make your payment before that day.
