Do you remember back in the day when you had a report card or report book in school?
The report was to tell your parents exactly how you were faring in school and was a reflection of your academic performance.
In a similar vein, a credit report is a report that reflects your credit payment history and financial stability. This is the document that banks and potential lenders look at when ascertaining if you’re a good credit risk.
Lenders will report your payment history to the credit reporting agencies. From this ‘lender reporting’ data, the credit agency will generate a credit report to determine your creditworthiness.
If you have a good credit score, you’ll get loans much more easily. If you have a bad credit score, trying to get a bank to issue you a loan or a credit card will be like squeezing blood from a stone.
Where can I get a credit report?
Everyone in the US is entitled to 1 free credit report a year. The most popular credit reporting agencies are Experian, Equifax and Transunion. You can get your free report by visiting: http://www.annualcreditreport.com/
Of course, you’ll need to provide details such as your name, date of birth, social security number and address. The website will verify your identity by asking you a few basic questions. Once all that’s settled, you’ll get your free credit report.
Reading your credit report
This is the part that scares most people trying to make sense of the details. While this should be taught in school, it isn’t. Nevertheless, it’s nowhere as complicated as you think it is.
The first part of the credit report will show you your identifying information such as your name, date of birth, etc.
Accounts in Good Standing
In the second part, you’ll see your ‘Accounts in Good Standing’. These are the accounts which have no outstanding balances, debt, etc.
It’s this section of the document that matters most to potential lenders. It will show how often you’ve defaulted on payments or if your account has gone to collections.
The credit limit or original amount section will list the maximum amount of credit the creditor will extend to you… and how much of it you have used.
All your credit cards, loans, etc. will be listed here and it will show whether you’re the individual owner or if you’re just the authorized user.
The status of the account will show if it’s open, closed or transferred. The type of debt will also be stated. For example, student loan, credit card, etc.
You’ll see a ‘Last Reported’ term in your credit report. This refers to the last time your creditor reported your payment details to the credit agency. This is nothing to be too concerned about.
The ‘Reported Since’ term shows when the creditor started reporting your account to the credit agency. Again, this detail isn’t of much significance to you.
What you’ll need to pay attention to are 3 terms:
- High Balance this is the highest monthly balance you owed on your credit cards, etc. during a specific period of time.
- Recent Balance this is the current and most recent balance you owe now.
- Payment History this is a record/history of your payments to your creditors. This is a very important metric when it comes to calculating your credit score.
Without getting overly technical, the key points to note here is that you must:
- Pay your bills in full and on time.
- Avoid taking on too much debt.
- Keep your credit utilization rate below 30%. For example, if you have $10,000 worth of credit available to you, do not use up more than $3,000. Any higher and it affects your credit score.
The ‘Public Records’ section of the report will show if you’ve encountered any financial embarrassment such as bankruptcy, court judgements, liens, etc. This section will weigh in heavily on calculating your credit score too.
The ‘Inquiries’ section will show how often creditors inquire on your accounts. You’ll want to limit the soft and hard inquiries here. For example, if you apply for 4 different credit cards at the same time, your account will show multiple inquiries from the different card issuers.
This is a red flag. Why do you suddenly need so many cards? Are you in debt? Will you be a credit risk?
Your financial affairs may be in order, but multiple inquiries for new credit within a short time frame will flag your account and negatively impact your credit score. So time your credit card/loan applications accordingly.
When studying your credit report, the devil is in the details. Pay close attention and if you spot any errors, you can dispute the item in the report. There have been many people who have discovered errors and gotten them fixed. So mistakes do happen.
Correcting these errors in a timely manner will help to improve your credit score. Once you dispute an item in the report, the credit reporting agency will begin an investigation to see if you’re correct. If you are, it will amend the details.
Mistakes in your credit report can haunt your record for years, even if it’s no fault of yours.
Think of a credit report as a financial ‘report card’. Even if you have ‘bad grades’ now, you can always improve on your performance.
Reduce your debt, pay your bills on time and avoid too many hard inquiries on your account. With time, your credit score will improve and you will have a glowing credit report that shows you’re a person worthy of credit.