How To Read A Credit Report
Credit reports contain records about our history of borrowing and repaying loans and lines of credit. And while these ultra-important documents are freely accessible to consumers at least once per year, they can be bewildering to those who have never reviewed one before.
With that in mind, we’ve gone inside a major credit report – translating each line into plain English and showing you what to focus on – in order to help you better understand and manage your financial information.
Inside Your Credit Report
Everyone has three major credit reports, one from each of the three major credit bureaus: Equifax, Experian and TransUnion. We are each entitled to a free copy of these reports once every 12 months, and WalletHub certainly recommends exercising this right. The best way to do so is to pull one report every four months. This will enable you to more quickly spot any errors or signs of fraud that may crop up.
In order to better illustrate what information a credit reports contains, how these items are listed and what you need to know about each section, we’ve broken down a sample Experian credit report in detail. While the information in your credit report may not be in this exact order or grouping, as differences exist between each bureau and individual bureaus often update their report structure, the following information will be contained in your file in some way, shape or form.
- Open & Closed Accounts
- Collection Accounts
- Public Records
- Requests For Your Credit History
- Personal Information & Statement
This section details each of the individual accounts that you have used in the past 7-10 years. This includes currently active accounts in “good standing” as well as closed accounts and accounts with negative items tied to them (e.g. missed payments, default, etc.).
The main things to watch out for here are accounts you didn’t open – which would indicate fraud – and errors in the details of each account. It is also very important that you strive to change the status of any negative items listed here – such as past-due payments – in order to stop the financial bleeding.
Explanation: Accounts will be organized by type, which means you may see details about auto loans, mortgages, credit cards and more listed in this section. This influences the Types of Credit Used component of your credit score.
This section is fairly self-explanatory, but make no mistake, it is extremely important as well. Having an account sent to collections is indicative of significant financial mistakes that must be researched and handled with care.
Explanation: If one of your accounts is passed on to a collection agency, a record will be made in this section of your credit report, detailing the status of the account. It is very important that you verify the accuracy of these notations as well as whether or not you even owe the debt in question. If you have any context to add to the situation, you can do so in the “Your statement” field.
Don’t get this section confused with where you’re biographical information will be listed. That’s the Personal Information & Statement section below. This section lists (typically-negative) public records such as tax liens and court judgments that may have relevance to your financial situation.
Explanation: Public records such as civil judgments and tax liens are recorded in your credit file for seven years – from the date of filing for judgments and from the date of repayment for tax liens. This indicates to potential lenders that you may be having financial difficulties and are thus a relatively risky applicant.
Specific details about each item will be noted in this section, enabling you to verify the accuracy and legitimacy of each record.
This section details the hard pulls of your credit history initiated by potential lenders or soft pulls that you have authorized.
Explanation: The first part of this section – Requests Viewed By Others – detail hard credit pulls. These records indicate that you are possibly being evaluated for a new loan or line of credit and that your total indebtedness may increase if that application is approved. As such, they have a temporarily negative impact on your credit standing. Too many hard inquiries within a short period of time, particularly those resulting from credit card applications, may indicate that you have a potentially risky need for additional spending power and may exacerbate credit score damage.
The second component of this section lists so-called soft credit pulls, which do not impact your credit standing. Soft credit pulls can be done for a variety of reasons – including for employment decisions and regular account maintenance by creditors and lenders. Just make sure you recognize all the names listed. Since they aren’t used for credit decisions, they aren’t visible to anyone but you.
This section contains biographical information about you as well as space for you to write a statement explaining any aspect of your financial history that may give potential lenders pause.
Explanation: There shouldn’t be too many surprises in your biographical information, but if you do notice any errors, make sure to report them. It could be a simple mistake, or a sign of fraud.
You should only submit a personal statement if you have a good explanation for a negative record in your file. It should not be used to express your enthusiasm for a new account you’re applying for, or to provide some lame excuse for a missed payment. It would, however, be acceptable to provide context to a missed payment by saying that it was your only one in three years, for example, and was caused by temporary life events that will not be a problem moving forward.
What To Focus On When Reviewing Your Credit Reports
Credit reports obviously contain a breadth of information, so it makes sense to prioritize what you’re looking for. For starters, if you have never looked at your credit reports before, we recommend pouring through them with a fine toothed comb – noting and following up on anything you’re not sure about. From then on, in addition to satisfying any initial issues, you can devote most of your attention to the following:
Verify & Change The Status Of Each Negative Item: Any negative information in your credit reports – records of missed payments or tax liens, for example – report are extremely important, as they serve as distinct red flags to potential lenders and will remain on your file for 7-10 years. So, anytime a new item appears here, you should first verify its legitimacy – making sure all records pertaining to the incident are up to date.The next step is to stop the bleeding, if the item is for real. That may entail repaying all amounts owed, working out a separate deal with the collecting party or settling a legal matter. You won’t be able to do so overnight, but it is important that you develop a plan for changing the notation on your report to something more favorable to your overall credit standing.
If a negative item is listed on your report in error, you will also want to dispute the inaccuracy with the bureau in question as well as the organization that is the source of the record. You can learn more about the dispute process in our Guide to Fixing Credit Report Errors.
- Account For Each Account: An account you don’t remember opening is a stark sign that you may be a victim of fraud, so make sure you recognize each item listed in the Accounts In Good Standing section of your report. This includes verifying that all supporting information is correct and disputing the item if necessary.
Double-Check Payment History: You may already accomplish this when verifying negative items, but given how easily avoidable missed payments are and how detrimental they are to your credit, it bears emphasizing anyway. If you are ever listed as being late on a payment that you don’t recall being late on, let both the credit bureau and the account provider know.What’s more, if you typically pay your bill on time but fail to do so once in a blue moon, you may be able to ask the provider to waive any resulting fees and refrain from reporting you to the bureaus as being late. Keep in mind that credit card companies do not report single missed payments, only noting cardholders as being late when they have missed two consecutive monthly minimums.
- Look For Discrepancies Between Bureaus: Some discrepancy between your credit reports is to be expected, since the major bureaus use different templates and notations for their files. However, if there are any substantive differences in the way accounts or negative items are noted across bureaus, someone has to be wrong. And finding out what is really going on is essential to moving forward responsibly.
Signs Of Mistakes
Credit bureaus make mistakes, a lot of them. The Federal Trade Commission pegs the number of 1 in 5 reports containing errors. Other studies believe the issue is more pervasive, arguing that up to 90% of reports contain inaccuracies. Either way, it’s something we all have to worry about.
Here are the most common mistakes to be on the lookout for:
- Errors In Biographical Info
- Accounts You Didn’t Open
- Wrong Dates
- Inaccurate Payment Amounts
Image: Nicolesa / Shutterstock
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