Credit Reports 101
It may not be as interesting as a biography or memoir, but your credit report tells one story of your life: the financial one.
And when you make the biggest financial decisions of your life, you’ll want to have a good one.
When you want a mortgage, auto loan or other line of credit, a good credit report will not only help get you approved but can also save you thousands of dollars in interest over the life of the loan. A credit report marred with late payments or even falsely reported information, on the other hand, will not only cost you a lot of money in interest, but can keep you from getting that loan for your dream car or home.
Credit Reports in a Nutshell
Your credit report is one factor that lenders consider when deciding whether to loan you money. As a record of your borrowing, it documents every line of credit you’ve ever had, from credit cards to mortgages, and whether or not you have made payments on time or at all.
Credit reports are distilled into a three-digit number called your credit score, which also helps lenders decide whether or not to extend credit to you. Credit scores typically range from 300 to 850, though this scale can vary depending on who developed the credit score model. Generally, a credit score of 720 is considered “good,” and will get you the best rates available on loans and credit cards. However, it’s important to remember that lenders can have different standards for what they consider to be a good credit score.
Credit reports are created and maintained by the three major credit bureaus—Equifax , Experian and TransUnion—which collect individuals’ credit information, then sell it to lenders such as credit card companies and banks. That means you have three credit reports, although they should contain the same information. The lenders you do business with will report your lines of credit and your repayment habits to the three credit bureaus. (Keep in mind that some lenders, such as smaller credit unions, may only report to one or two credit bureaus. Reporting to the bureaus costs money, and it is sometimes too expensive for smaller companies.) The bureaus will then collect that data in your credit report to create a complete snapshot of your credit health. Most people over the age of 18 have a credit report, even if their credit history is short.
Why Your Credit Report Is Important
Let’s say you want to buy a home. As you shop around for a mortgage, each lender will take a look at your credit report and score. Your credit score is kind of like a numerical grade of your credit report. That grade, along with the details of your credit report, will determine two things: Whether or not you’re approved for the loan, and what interest rate you’re offered.
If your report shows you have a long and positive credit history, lenders will be more likely to approve you for a loan and offer you low interest rates.
n. Created and maintained by the three major credit bureaus, you credit report is a detailed account of your credit history. For each of your various credit accounts, it lists how much you owe, whether you pay on time and other details that help a lender determine how risky it is to lend to you.
n. This is a full record of your debt repayment. It includes all of your borrowing activity on individual credit lines: how long each account has been open, what the remaining balance is, when you’ve paid on-time and when you’ve made late payments. This history will help lenders decide whether or not it’s likely that you’ll repeat your past behavior, whether positive or negative. That decision will determine your approval and your interest rates for loans and credit cards.
n. Also known as a consumer reporting agency, a credit bureau is a company that collects and stores information on individual consumers in credit reports. Financial institutions and lenders report consumer information to these bureaus, which in turn sell the information back to potential lenders.
n. This is any financial account that involves the borrowing of money and the paying back of debts. Credit lines include credit cards, student loans, mortgages, auto loans, home equity lines of credit and personal loans. They do not include bank accounts or savings accounts.
Think about it this way: If your credit score is your GPA, your credit report is kind of like your high school transcript, containing all of the courses you took and the grades you received. Just as your high school transcript will help determine which college you’ll attend, your credit report will help lenders predict what kind of borrower you will be and decide what loans they’ll approve you for.