What do a credit report and a pirate have in common, and why are they both so important to leading a financially solvent life?
I still remember the TV commercial with a band, dressed as pirates, singing about how a hacker stole the identity of the lead singer, and how he now had to serve chowder to tourists because he had no credit.
The commercial was silly, but it did make you think about getting a copy of your credit report. Let’s talk about what a credit report is, why it’s important, and how to read it.
What Is a Credit Report?
A credit report provides information about your credit history.
It indicates what type of credit you use, how long your accounts have been open or closed, your credit limit for each card, the total amount for each loan you possess, and whether you pay your bills on time.
This is important because lenders use this information to determine how much credit they should consider giving you and at what interest rate.
The credit score, on the other hand, is a much more limited measurement. With FICO scores in particular, 30 percent of your score is dedicated to unpaid debt, 10 percent to new credit, 15 percent to the length of credit history, 10 percent to the mix of credit, and 35 percent to payment history, according to FICO.
The report gives a better picture of your credit history and creditworthiness than your credit score does.
There are three major credit bureaus that maintain credit reports: Equifax, Experian, and TransUnion. Information submitted to these bureaus may differ. For example, a business might report information to only one of them. As a result, your credit report from Experian might look slightly different from the TransUnion one.
What’s on Your Credit Report?
Your credit report doesn’t list only your credit cards. Expect to see your previous addresses, employers, student loans, personal loans, mortgages, and so on.
If there are any errors, be aware that these things do occasionally happen. However, if you see charges or names that you don’t recognize, you may be a victim of identity theft. If you suspect that you are a victim, report the fraudulent activity immediately to avoid having to pay additional charges. This is one good reason to check your report regularly.
If you have been a victim of identity theft, be sure to address the issue quickly to help clean your credit report. “First, place a 90-day fraud alert on your credit report with all three credit bureaus: Experian, Equifax, and TransUnion,” says financial educator Amy Maliga of financial literacy nonprofit Take Charge America.
“Next, contact the Federal Trade Commission at IdentityTheft.gov,” Maliga adds. “Provide as much detail as you can about what happened and they will create a personalized recovery plan and walk you through each step of the process, including pre-filling forms and letters to send to your creditors, service providers, and other businesses you deal with financially.”
“Keep a close eye on your credit report every month for at least a year. Look for unauthorized accounts, collection accounts, or other errors that don’t belong to you and open disputes with the credit bureaus,” Maliga concludes. “Finally, file a report with your local police department.”
Your credit report will include debt and other financial information, as well. If you don’t pay your cable bill for several months, for instance, the cable company might send your unpaid balance to a collection agency. That will then show up on your credit report and will negatively impact your credit score.
Your medical debt will also appear, in addition to other public information, such as bankruptcy (which remains for seven to 10 years), foreclosures (which remain for seven years), and collections (which remain for seven years).
What Is the Purpose of a Credit Report?
When you apply for a loan, fill out an apartment application, or apply for a new credit card, you authorize the lender to check your credit report.
When you’re shopping for rates, you should have the inquiries grouped together.
This decreases the impact it will have on your credit score. You should also do it within the shortest period of time possible, though you cannot avoid the impact altogether.
“Hard inquiries will always alter your credit score,” says chartered financial analyst Lou Haverty. “But the inquiries hold only a small weighting [10 percent] against your entire score, so it’s not hugely significant unless you check your credit excessively.”
Not all shopping windows are created equal, though. “The latest FICO scoring model allows for consumers to have a shopping window of 45 days and the Vantage scoring model allows for 14 days,” says Nathalie Noisette, founder of Credit Conversion.
“All inquiries generated within that time will not be counted against you and will be grouped into ‘one inquiry’ as far as the impact to your score is concerned,” Noisette says.
A soft inquiry, on the other hand, is made by employers or others (such as insurance companies or landlords) who do not seek to give you credit, according to Haverty. As such, a soft inquiry won’t influence your credit score, as it’s not linked to a specific credit request.
It’s recommended that you check your credit report at least three times per year to ensure that all of the information is correctly listed. Some of the most common forms of credit report inaccuracies include:
- Errors in Personal Information: You may find that your credit report lists your name, address, telephone number, or other information incorrectly. This could be a sign of identity theft, or it could simply be a mistake on the report itself. Be sure to contact the issuing credit bureau and whichever organization provided that information to the credit bureau.
- Payments Incorrectly Marked Late: At times, you may find that a payment that you made prior to the due date is still marked as late. This is easily rectified, but can still cause problems for your credit score, so be sure to address this quickly.
- Outdated Information Not Removed: Be aware of the date that previous issues, like bankruptcy and foreclosures, should be removed from your credit report. After a maximum of 10 years, the records should be removed from your credit report.
- Divorce Is Not Reflected on Report: If you’re divorced, your previous spouse’s debts should have been removed from your credit report. If they haven’t been, be sure to let the credit bureaus know.
- Closed Account Not Properly Marked: If you have closed a credit account recently, be sure that it is not labeled as having been closed by the “grantor,” as this could adversely affect your credit outlook.
If you find an issue with your credit report, be sure to visit FICO to learn more about how to dispute the incorrect information. Make sure to report as quickly as possible, as these sorts of problems can alert you and the authorities to any potential identity theft.
How to Get a Copy of Your Credit Report
To obtain a copy of your credit report, you’ll need your Social Security number, date of birth, and addresses for the last two years.
You’ll need to answer personal security questions like, “In which county did you live in 2008?” or “Which address is not one of yours?”
Once you open your credit report, you’ll see personal information, including your Social Security number and any previous names, addresses, and phone numbers that you’ve had.
You’ll also be able to look through your credit card accounts. This will indicate whether you are current or delinquent on any payments.
The report will also list which accounts have been closed. Any inquiries made on your report will be there, too, along with your debt. That’s how credit reporting works. If you find that your credit needs repair, there are companies that may be able to help you.
You’re entitled to one free report per bureau every 12 months, available only at AnnualCreditReport.com. Unless you plan to apply for a loan, you may want to space out the requests over the course of the year. That way, you can monitor any unexpected changes.
By tracking your credit report over time, you will become more aware of your finances. Plus, you’ll be better prepared if and when you want to apply for a major loan.
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Additional reporting by Kelly Meehan Brown.