You might have heard the term “credit report” being thrown around before and know that there’s one out there with your name on it, but do you know why it exists, what’s on it, or why it’s important?
Well, for starters, a credit report is basically a summary of all your credit-related activities. This could be anything from using your credit card, tapping into a line of credit, or making payments on either of these types of accounts.
Your credit report is going to have all sorts of information on your credit accounts, like how long each account has existed, how much money you need to pay back, whether or not you’ve been making your payments on time, and more. As soon as you start to use credit, your credit report will be created. It’s going to continue to be updated whenever you borrow money, apply for new credit (like a credit card or line of credit), make (or miss) payments on your accounts, and more. All of your credit activity over time is called your credit history.
What is a Credit Score?
Your credit report is going to hold all sorts of information about your credit history, but how does this information get used? Well, one of its main functions is to calculate what’s called your credit score. This is a three-digit number that’s meant to show how reliable you’ve been when it comes to borrowing money over time. Your credit score is considered better – meaning you’ll be viewed as more “creditworthy” by financial institutions – the higher it is. There are different scoring models, but the FICO model, which is the most commonly used model, operates on a scale of 300 to 850.
Your credit score is important because it’s sometimes one of the first and most important things that a lot of financial institutions – like lenders or banks – will look at once you’ve applied for a personal loan. This means the strength of your score can have a big impact on whether or not you qualify for a loan.
Who Puts Your Credit Report Together?
The organizations that keep track of your credit history and put together your credit report are called credit bureaus, which are also sometimes referred to as credit reporting agencies. It’s their job to collect the relevant data, create your credit report, and calculate your credit score. While the information that they collect is used by financial institutions to make lending decisions, they’re not directly involved in those decisions.
In the U.S., the three major credit bureaus are Equifax, Experian, and TransUnion. They’ll gather the information they need to generate your report.
Why is it Important to Check your Credit Report and your Credit Score?
We mentioned that the information on your credit report is used to come up with your credit score, but your credit score isn’t always going to show up your report. We’ll go over ways for you to get a hold of both your credit score and credit report later. For now, let’s walk through some of the key reasons for you to regularly check in on your report and your score.
1. Find Errors on your Credit Report
While errors on your credit report won’t necessarily happen often, they do still pop up from time to time and the responsibility to review your report for errors falls on you.
So, by checking your report every now and then, you can take the time to make sure that the information on it is accurate. If it’s not, you can start the process of reporting the error to the credit bureau and the relevant creditors (like your credit card company or lender) to get it removed.
2. Look for Signs of Fraud
An error on your credit report can hurt your credit score, but dealing with identity theft is a whole different story. If a fraudster gets a hold of your personal financial information, they can wreak havoc on all sorts of aspects of your life.
So, with that in mind, it’s a good idea to check your credit report for any signs of suspicious activity. If you see any accounts that you didn’t open, or any sort of balances that you don’t recognize, report these immediately to the creditors and to the credit bureau that provided the report.
3. Understand what Impacts your Credit Score
The more you go over the things that pop up on your credit report, the better understanding you’ll have of what types of things get reported and what’s impacting your credit score.
Credit bureaus don’t tell you the exact calculations they make to come up with your credit score, but they do tell you the general categories that go into this calculation, and how much each category is weighted. They look at:
Payment history (35%) – The more payments you make on time, the better. By missing payments on credit accounts that get reported to credit bureaus, you may be hurting your credit score. Keep in mind that some service providers won’t report your on-time payments, like your cell phone provider, but they may report your missed payments.
Amounts owed (30%) – This category is all about how much of your available credit you’re using.
Example
Right now, you have one credit card and one personal line of credit. Both of these accounts have a credit limit of $2,500, meaning that’s the max amount of money you can spend using either account. Between these two accounts, you have a total of $5,000 that you can access. Right now, you’ve used $1,000 on your credit card and $1,500 on your line of credit, which means you’ve used 50% ($2,500 in this case) of the total credit available to you. This percentage is what’s called your credit utilization rate. If you’ve used a large chunk of your available credit (over 30%) and haven’t paid it back yet, to a credit bureau, it might look like you’ve overextended yourself, making you a higher risk borrower.
Length of your credit history (15%) – Generally speaking, the longer your credit history, the better it is for your credit score. This is something that depends on a number of factors, but you may want to consider this when you’re thinking about closing old credit accounts.
Mix of credit (10%) – The variety of accounts you have, like lines of credit, credit cards, installment loans, could impact your credit score. Generally, the bigger the mix, the better. Having said that, you shouldn’t ever apply for credit just so you can diversify the type of accounts you have.
New credit accounts (10%) – If you open multiple new credit accounts over a short period of time, this may be seen as risky behavior, especially if you don’t have a very long credit history.
4. Understand What Rates you may be Eligible for
If you’re in the market for a personal loan and you have your credit score in hand, for some cases, you may be able to get a better idea of what types of loans you should be looking for and what interest rates you may be able to expect. This can help with the research process.
For example, if your credit score is 800 or higher, you’ll likely be able to look for loans with rates on the lower end of the spectrum. If you have bad credit, you’ll need to keep that in mind when searching for a loan.
How can you get your Credit Report and your Credit Score?
Every year, you’re entitled to a free copy of your credit report from each of the three major credit bureaus. That means you can get a free copy three times a year. All you need to do is visit AnnualCreditReport.com to get started[1].
However, your credit score won’t typically show up on your credit report. If you want to get a hold of your score, you can purchase it separately from a credit bureau. You can also look online for a free credit scoring website. Finally, some financial institutions have started to include your credit score on your statements.
Disclaimer: This article provides general information only and does not constitute financial, legal or other professional advice. For full details, see CreditFresh’s Terms of Use.
