Credit Reports 101
But lenders aren’t the only ones who will look at your credit report. It could help or hinder you in getting a job, affect your insurance rates and help you detect identity theft. Potential employers may request permission to view your credit report before deciding to hire you. Also, companies can buy your credit information if it’s for “legitimate business needs.” For instance, insurance companies often view your credit information when determining your insurance rates since past behavior is a good indicator of future behavior.
What’s in Your Credit Report
Your credit report contains information about your credit cards, student loans, mortgages, auto loans, home equity lines of credit and personal loans.
Specifically, it details:
- how long each account has been open
- how much you owe on each account
- how much available credit you have (your credit limits)
- how often you’ve paid your bills on time
- and whether or not you have any recent credit inquiries.
As you can see, it just might give potential lenders an idea of how you’ll handle a loan from them.
Your credit report will also, if applicable, include any negative information related to your credit. This includes debts that have been sent to collection agencies, bankruptcies, foreclosures, federal tax liens, late payments and hard credit inquiries, which occur when a lender checks your credit for a loan approval. The more serious of these negative items, such as bankruptcies and foreclosures, will severely limit your ability to get approved for a loan or line of credit. However, most of them will stop negatively affecting your credit after a period of seven to 10 years.
Lastly, your credit report also lists some personal identification information, like your name (or any past names you’ve used) and former and current addresses.
What You Should Do Now
1. Always pay your bills on time.
Want a good credit report? The best way to get one is to never miss a payment.
2. Keep your credit card balances to less than 30 percent of the credit limits.
The ratio of your balance to your credit limit is called your credit utilization rate. A rate of less than 30 percent shows lenders that you’re using your credit regularly and responsibly.
3. Hold on to your oldest accounts.
Unfortunately, those with short or no credit history (or no credit accounts) will find it more difficult to gain access to credit. That’s because lenders base their decisions on your past actions; if you have none to show, they likely won’t take the risk of lending to you. Unless they’re costing you a lot in annual fees, don’t close a credit card account once you pay the card off. Instead, keep your oldest credit card accounts open so that your credit history is as long as possible.
4. Check your credit report at least once every four months.
The Fair Credit Reporting Act (FCRA) requires each of the three credit bureaus to provide you access to one free copy of your credit report every 12 months. You must request each report; it won’t be mailed to you. You should stagger your requests throughout the year so that you receive a report from one of the three credit bureaus every four months, but you still only get one per year from each company. Use our checklist to get your credit report.
There are also a few other times when you can legally receive a free credit report, such as when a company denies you credit or employment based on your credit report, or if you become unemployed. Check out the FTC’s website for details on your rights in these instances. You can also monitor your TransUnion credit report for free with Credit Karma. Once you’re signed up, the service will email you whenever something significant changes in your credit report, like a new account or a new hard credit inquiry.
If you ever use up all your free reports in a year and want to buy one, the costs vary from bureau to bureau, and each bureau also offers several packages at different prices. Here is the cost breakdown at each: Experian, Equifax and TransUnion.
5. Comb your credit report for errors and dispute any.
Errors could reflect negatively on your credit and prevent you from getting a loan or lead to a higher interest rate on your loans. It’s been reported that as many as 25 percent of credit reports could contain serious errors. These errors can include outdated personal information (not that serious), incorrect account details (possibly serious) and mistaken or fraudulent accounts (very serious).
If you find one of these errors, dispute it by sending a letter to the credit bureau and the company reporting the incorrect information. (See our checklist for more info.)
The first step to making some of the biggest purchases of your life begins with understanding your credit. You must know what’s in your credit report, how to improve it and what it will be used for. If you wait to build a good credit report until you need one, it will be too late.
Make today’s goal to get a copy of your credit report; it’ll take less than five minutes, and it’s free. Once you know what’s in your credit report, you can begin improving your credit.