What is a credit report?

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Your credit report is more than a compilation of numbers — it's a tool that can open or close doors to your financial future. Lenders, landlords, and even employers rely on the information contained in your report to assess your creditworthiness and make decisions that can impact your life.

Credit reports contain personal information, credit account details, and public records like bankruptcies and foreclosures. Checking your credit reports for errors is crucial, as mistakes can negatively impact your credit score.

Here's a closer look at what a credit report is and how it impacts your financial health.

What is a credit report, and why does it matter?

A credit report is a detailed record of your credit history, serving as a snapshot that lenders use to evaluate your creditworthiness. It's like a financial report card, showing how well you've managed your credit over time.

Each credit bureau — Equifax, Experian, and TransUnion — maintains their credit report for you.

Your credit report plays a crucial role in your financial life. Lenders, creditors, landlords, and even employers use the information in your report to make decisions that can impact your future.

When you apply for a loan, credit card, or mortgage, lenders review your credit report to assess your risk as a borrower. Strong credit can lead to better loan terms, lower interest rates, and higher credit limits. Conversely, poor credit may result in denied applications or less favorable terms.

But the importance of your credit report extends beyond just borrowing money. Many landlords use your report to screen potential tenants. Some employers may check credit reports as part of their background check process. Insurance companies may also use your credit information to determine your premiums.

Your credit report can alert you to potential identity theft or fraud. By reviewing your report, you can spot unauthorized accounts or activity and take action to protect your finances. 

“You need to check your credit reports for inaccuracies. Otherwise, you might be unfairly denied a job or credit,” says Kathleen Day, a Johns Hopkins Carey Business School lecturer. “You might get overcharged for credit. You want to make sure that your credit reports are accurate.”

What information is included in your credit report? 

Your credit report contains information, including your personal details, credit accounts, public records, and inquiries. 

Personal information

Your credit reports will include your name, address, birth date, Social Security number, and any reported phone numbers associated with your name. This section will also list your current and former employers and your titles at these companies.

This information is vital, as it forms the foundation of your credit score. FICO, the most widely-used scoring model, bases 35% of your score on your payment history and another 30% on your credit utilization (the amount you owe compared to your credit limits).

Credit accounts

The heart of your credit report lies in the detailed account of your credit history.

This section will list all your open credit accounts, including loans and credit cards, separated into two categories: accounts with potentially negative information and those in good standing. If you’ve made a payment on time and it meets the terms of your creditor, it’s considered in good standing.

For each account, you'll find the creditor's name, the type of account (such as a mortgage, auto loan, or credit card), the account number, the date the account was opened, your payment history over the last seven years, the current balance, and the credit limit or original loan amount.

This information is vital, as it forms the foundation of your credit score. FICO, the most widely used credit scoring model, bases 35% of your score on your payment history and another 30% on your credit utilization (the amount you owe compared to your credit limits).

Public records and collections

If you've experienced financial setbacks, such as bankruptcies, foreclosures, or accounts sent to collections, this information will appear in the third section of your credit report.

This section will detail the type of public record or collection, the date it was filed or reported, the amount owed, and the current status of the record. These negative marks can impact your credit score, often dropping it by 100 points or more, depending on the severity and your credit profile.

These negative items have a lifespan on your credit report. Chapter 13 bankruptcies, foreclosures, and accounts in collections generally remain for seven years. Chapter 7 bankruptcies can linger for up to ten years.

Inquiries 

The lender will request a copy of your credit report whenever you apply for credit, whether a new credit card, a mortgage, or an auto loan. These requests are known as inquiries and are recorded in a separate section of your report.

There are two types of inquiries: hard inquiries and soft inquiries:

• Hard inquiries occur when a lender pulls your credit report to make a lending decision and can slightly lower your credit score (usually by a few points). 
• Soft inquiries, such as those generated by preapproved credit offers or when you check your credit, don't affect your score.

Credit reports vs. credit scores 

While often mentioned together, credit reports and credit scores are two distinct things. Your credit report is a detailed record containing information about your accounts, payment history, and public records. Your credit score is a three-digit number derived from the information in your credit report, designed to give lenders a quick snapshot of your creditworthiness.

Your credit score is calculated using an algorithm that considers factors from your credit report. The most commonly used credit scoring model is the FICO score, which ranges from 300 to 850. A higher score indicates better credit management and a lower risk for lenders.

The key components that make up your credit score are:

• Payment history (35%): Your track record of paying bills on time
• Credit utilization (30%): The amount of credit you're using compared to your credit limits
• Length of credit history (15%): How long you've had credit accounts open
• Credit mix (10%): The variety of credit types you have (ex., credit cards, mortgages, auto loans)
• New credit inquiries (10%): The number of recent applications for new credit.

While your credit score is based on your credit report, it's still a separate entity. Lenders may use different scoring models or consider additional factors beyond your credit score when extending credit. 

How to access your free credit reports

Accessing your credit reports is easy. Every week, you are entitled to one free credit report from each of the three major credit bureaus — Equifax, Experian, and TransUnion — via AnnualCreditReport.com.

Be cautious of other websites claiming to offer free reports. They may be scams or require you to sign up for paid services.

To verify your identity, you’ll need to provide some personal information, such as your name, address, Social Security number, and date of birth. You can request reports from one, two, or all three bureaus at once or stagger your requests throughout the year to monitor your credit regularly.

Common credit report errors and how to dispute them 

It’s important to review your credit reports regularly. Mistakes aren’t as rare as you may think. More than one-third of Americans found at least one error on their credit report, according to a Consumer Reports investigation.

Errors in your credit reports can impact your credit score, making it more difficult or expensive to secure loans, credit cards, or even housing and employment opportunities.

"If you are buying a car, you want to make sure that you get the best interest rates on that auto loan," Day said. “That's why you need to check your reports. It's not unusual to find errors, and those errors could result in you paying more than you should in interest.”

Common errors to look for include:

• Incorrect personal information
• Accounts that don't belong to you
• Inaccurate account balances or credit limits
• Late payments or collections that were reported in error
• Duplicate accounts

Fixing these errors as soon as possible is important. Removing an error or missed payment from your credit reports can improve your credit score immediately. To dispute something on your credit report, follow these steps:

1. Identify the error and gather supporting documentation, like payment records.
2. Contact the credit bureau online, by phone, or by mail to initiate a dispute. Explain the error and provide copies of documentation.
3. The credit bureau has 30 days to investigate your dispute and respond in writing with the results. They must also forward your dispute to the creditor who provided the information.
4. If the investigation reveals inaccurate information, the credit bureau must remove it from your report.
5. If you disagree with the outcome of the investigation, you can add a brief statement to your credit report explaining the dispute.

Strategies for building and maintaining a strong credit profile

A solid credit history and high credit score can open doors to favorable loan terms, competitive insurance rates, and even better job prospects. But how do you build credit?

“Rebuilding your credit doesn’t mean paying off all your debts at once,” says Hector Castaneda, CPA and principal at Castaneda & Associates. “Most people who have damaged credit can’t do that.”

Instead, here are some key strategies for achieving and maintaining a healthy credit profile:

• Pay your bills on time: Your payment history is the most significant factor in determining your credit score. Consistently paying your bills on time, including credit card balances, loan payments, and even utility bills, demonstrates to lenders that you are a responsible borrower and can manage your debts effectively.
• Keep your credit utilization low: Your credit utilization ratio, which measures how much of your available credit you use, is the second most important factor in your score. Aim to keep your balances below 30% of your credit limits, ideally below 10%, to show lenders that you can manage your credit responsibly without overextending yourself.
• Maintain a mix of credit types: Having a diverse mix of credit accounts, such as credit cards, installment loans (like auto or personal loans), and mortgages, can show your ability to manage different types of debt responsibly.
• Limit new credit applications: Each time you apply for credit, a hard inquiry is recorded on your credit report, which can temporarily lower your credit score. While a single inquiry may only have a minimal impact, multiple inquiries in a short period can be a red flag to lenders. Be strategic about when and how often you apply for new credit.
• Keep old credit accounts open: The length of your credit history is another important factor in your credit score. Keeping old credit accounts open, even if you no longer use them, can help show a history of responsible credit management. However, if an old account has an annual fee and you're not using it, it may be worth closing to avoid the cost.
• Monitor your credit regularly: Regularly reviewing your credit reports and monitoring your credit score can help you catch potential errors or signs of identity theft early. By addressing these issues promptly, you can prevent them from causing long-term damage to your credit profile.
• Use credit responsibly: Avoid overspending, stick to a budget, and make sure you're only borrowing what you can afford to repay. Remember, building and maintaining credit is a long-term process. "It’s like when you’re trying to lose weight. You don’t step on the scale every day,” says Castaneda. “Take the baby steps and be patient. You will see results.” 

 Frequently asked questions about credit reports 

The bottom line

Your credit report is a financial report card that lenders, landlords, and employers may check when you apply for credit, housing, or a job. Regularly checking your credit reports for errors is crucial, as mistakes can negatively impact your credit score and financial opportunities.

Building strong credit involves paying bills on time, reducing credit card debt, and managing credit responsibly.

Editorial disclosure: Opinions expressed are author's alone, not those of any bank, credit card issuer, or other entity. This content has not been reviewed, approved, or otherwise endorsed by any of the entities included in the post.