How to Decipher Your Credit Report


Q: What is a credit report, and why should I care?

A: The most critical thing to look at when it comes to your credit history is your credit report. The credit report is like your financial report card. This (and the credit score) is the first thing any company will look at when you apply for a loan, for a credit card, for any form of credit.

In fact, even potential employers can legally pull your credit report after notifying you – and 35% of them do! Landlords will likely check your credit report before renting you an apartment, and insurers will look at it before insuring you. In short, your credit report is very important.

What’s on a credit report?
The information on your credit report contains several key factors that businesses use when determining if you are trustworthy enough to borrow money. Some of these factors include:

Age of credit lines
Accounts that you have had open for a long time look best on your credit report. Potential lenders, employers, or insurers want to have consistent customers – it saves them the cost of searching for new customers and having high customer turnover. If you have old accounts and long histories, lenders view you as less of a statistical uncertainty. So think before you close out old credit cards – do you have the self-discipline to not max it out, if you decide to switch to a card with better benefits? Consider leaving it open and using it every once in a while to help your credit score. If you are having credit card debt issues, however, don’t risk the temptation of keeping easy credit lying around.

Credit inquiries
Your credit report will also show who has been looking into your credit. It will list two types of inquiries: hard inquiries, and soft inquiries. Soft inquiries are requests that are for informational purposes only. For example, if you check your own credit report, or have a credit monitoring service that checks it for you, your creditworthiness will not be penalized. If, however, you are requesting inquiries for the purpose of obtaining new credit (car loan, student loan, mortgage, credit card, etc), having to many hard inquiries can damage your creditworthiness. If it looks like you are trying to borrow a ton of money all at once, lenders once again see you as more unpredictable. In case you haven’t caught on, you will pay more for credit if you are unpredictable.

Types of accounts
Do you have credit cards? Car loans? Mortgages? Student loans? They will all be on your credit report. Issuers of credit want to see that you’ve been responsible with similar types of credit in the past – hence, if you have a car loan in good standing on your credit report, you’ll be more likely to get a good rate on a car loan in the future.

Balances on accounts
Yes, your credit report actually shows how much credit you are using. Companies look at how much of your available credit you are using when they are deciding to issue you additional credit. If you are constantly close to your limit on every card, they will probably assume that you would do the same thing if they give you another card.

Payment history
Payment history is critical. If you have been paying your bills on time, with no late payments, for years and years, you are awesome. However, not everyone is in that situation. Most people slip up once in a while and pay a credit card bill a few days late, or the cable payment gets bounced back because you changed banks and forgot to update the automatic billing information. All of those late payments show up on your credit report for seven (!) years. If you are late on many of your payments, it looks bad to the banks who might otherwise want to do business with you. They would consider you a risky bet, and might not issue you credit. If they do issue you credit, it will likely be at a high interest rate to cover their riskier bet on having you as a customer.
Ok! Now that you know the basics of what is on your credit report, it is time to go get your financial report card. Visit AnnualCreditReport.com (don’t get confused with FreeCreditReport.com, even though they have catchy commercials). You are allowed one free copy of your credit report from each of the three issuers (Equifax, Experian, and TransUnion) per year. Remember – make sure it is AnnualCreditReport.com – that’s the free one.

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