How to Read Your Credit Report
According to the Library of Congress, the number of books held inside the massive repository total almost 22 million copies.
But one of the most important documents you'll ever read isn't stored in Washington, DC – it's your credit report.
Credit reports are the files that credit report agencies maintain about your credit history and share with the rest of the world – or at least with the part of the world that might want to extend a loan to you or green-light good credit for you.
By and large, credit scoring mechanisms are fairly easy to understand. A credit score in the low 600's signals a problem for a lender. That doesn't mean you can't get a loan, but it likely means you'll pay a higher interest rate to get it. On the other hand, a score in the upper 700's is a joy to behold for a lender – and for you, too, as you'll probably get the loan at a lower rate since you're such a good credit risk.
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Credit scoring models look at people with similar financial backgrounds and habits to assess your score. That model includes past credit history, any big purchases made (and whether it/they were paid off or not), types of credit accounts you've managed, and any recent applications or attempts to obtain credit. Based on the collective "credit history" of loads of people who are a mirror image of you financially, your credit score is meant to forecast your future abilities to handle debt and make timely payments to lenders and creditors.
So when you read your credit report, you have to know what to look for.
Where to begin? For starters, your credit score is based on five key financial criteria. These are the "five keys" to reading – and understanding – your credit report.
- Payment History: About 35% of your credit score is based on your bill payment history.
- Amounts Owed: About 30% of your score is based on the amount of money you currently owe.
- Length of Credit History: About 15% of your score is based on how long you've had credit.
- How Much Credit? About 10% of your score is based on new credit activity or recent applications for credit.
- Types of Credit: About 10% of your score is based on the kinds of credit you have, i.e., auto loans, mortgage loans, credit card accounts, school loans and the like.
Check everything in the report carefully. It's entirely possible, and not all that uncommon, for banks and credit companies to make a mistake. If you spot any accounts that you don't recognize, dates that don't seem to match up, and especially if you see any mention of late payments or penalties, make certain they have been recorded correctly - and don't be afraid to call the company in question for details. Far better to spend a few minutes on the phone clearing something up, than leave a mistake on the report that could adversely affect your credit record. If you're an otherwise reliable customer with one or two late payments in your history, you may ask the lender to remove that from your record, as a goodwill gesture. (Though you should note that closing an account on which you've made late payments in the past does not remove that account from your records ... all the more reason to be careful from now on!).
What won't you find on your credit report? Things like your income and bank balance, the interest rates you pay on other loans, your occupation, job title, employer, time with your company, and employment history do not count on your credit score.
Getting your credit report is a cinch. To take advantage of your one free annual credit report, visit www.annualcreditreport.com or call 1-877-322-8228. Keep in mind that these reports do not include a free credit score. If you want to know your scores, you'll need to purchase them. If you've already ordered your free credit report for this year, it's still a good idea to check your report periodically to make sure the information is accurate and to detect any issues that may damage your credit rating - identity theft or inaccuracies, for example.
And remember, there are three major consumer reporting agencies – Equifax, Experian and TransUnion – make sure to obtain a report from each one as the information from bureau to bureau can vary.
Reading your credit report and knowing it from the inside out isn't difficult, but it is necessary. So get your report, pour yourself a cup of coffee, and dig in.
It might be the most rewarding read of your financial life.