What is a Credit Report and Why is it Important?

You may be vaguely aware that there’s something called a credit report out there that exists 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 essentially a summary of all your credit-related activities. It contains all sorts of information on your credit accounts like how long each account has existed, what the balance is, whether or not you’ve been making your payments on time, and more. As soon as you start to partake in any credit-related activity, your credit report will be created. It will continue to be updated as you borrow money, apply for new credit, make (or miss) payments on your current accounts, and more. The totality 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 details pertaining to your credit history, but how does this information get used? Well, one of its primary functions is to calculate what is known as your credit score. This is a three-digit number that acts as a summary of your history as a borrower. 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.

Person going through their credit report.

Your credit score is an important part of your financial profile, as it’s sometimes one of the first and most important things that a financial institution will look at once you’ve applied for a personal loan. But how, exactly, will it affect your application, and why is it important for you to check your credit score and credit report regularly?

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Who Puts Together your Credit Report?

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 are not directly involved in those decisions. This call rests with the financial institution that’s issuing or servicing the loan.

In the U.S., the three major credit bureaus are Equifax, Experian, and TransUnion. They will communicate with your creditors in order to gather information like:

  • Your name, address, and other basic personal information
  • Credit inquiries
  • Public records
  • Collections information
  • Information on your various credit accounts

What is the Importance of Checking your Credit Report and your Credit Score?

While the information on your credit report is used to determine your credit score, your credit score typically won’t be shown on 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. This can either be because of some sort of software glitch, or simply from human error. It’s possible that the credit bureaus that put together your credit report don’t take the time to consistently review your report for errors. That responsibility falls to you.

So, by checking your report on a somewhat frequent basis, you can take the time to verify that the information on it is accurate. If it’s not, you can start the process of reporting the error to the credit bureau as well as the relevant creditors to get it removed.

But why take the time to correct these errors? Well, depending on what the error is, it could be inadvertently be doing damage to your credit history without you even realizing it. This can harm your credit score which can make it more difficult to get approved for credit moving forward, amongst other things.

2. Look for Signs of Fraud

The damage that can be done by an error here and there on your credit report can be significant, but dealing with the fallout that can come with identity theft is a whole different story. If a fraudster gets a hold of your personal financial information, they can wreak havoc on your financial profile and your life in general.

A person's hand holding a small magnifying glass.

So, because of this, it’s a good idea to check your credit report for any signs of fraudulent activity. If you see any purchases on your report that you didn’t make, any accounts that you didn’t open, or any sort of transactions being made in your name that you have no memory of, report these immediately to your creditors and to the credit bureau that provided the report. They’ll likely put a freeze on your accounts to limit the damage, and depending on the situation, you may also be able get the money back that was spent by a fraudster.

3. Understand what Impacts your Credit Score

The more you review the transactions 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. With that knowledge in hand, you may be able to start changing some of your financial habits for the better in order to impact your credit score.

While you won’t be able to know the exact formula that’s used to come up with your credit score, credit bureaus are able to disclose the general categories that go into this calculation, and how much each category is weighted. They look at:

  • Payment history (35%) – This category looks at your history of making on time payments. The more payments you make in a timely manner, the better. By missing payments on credit accounts that get reported to credit bureaus, you may be harming your credit score. It’s also important to note that while some service providers won’t report your on-time payments, like your cell phone provider, they may report your missed payments.
  • Amounts owed (30%) – This category pertains to how much of your available credit you’re using. If you have a limit of $5,000 across all of your revolving credit accounts, like your credit cards and lines of credit, and you’re currently using a large chunk of your available credit (over 30%), you may be seen to have 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 you may want to consider when you’re thinking about old credit accounts.
  • Mix of credit (10%) – Scoring models take into consideration if you have a wide array of credit accounts, like lines of credit, credit cards, installment loans, and more. Having said that, you shouldn’t ever apply for credit for the purposes of impacting your credit mix.
  • New credit accounts (10%) – If you open multiple new credit accounts over a short period of time, this may be seen as risky behavior, particularly 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, 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.

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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 a Copy of your Credit Report and your Credit Score?

So, how do you go about getting a copy of your credit report? It might be easier than you think! 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].

Person talking about their credit report on the phone while looking at their laptop.

Like we mentioned, 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, so it’s a good idea to check there as well.

Check your Credit Report Regularly

Both your credit report and your credit score are very important parts of your financial profile, so it’s important that you check in on them regularly. This can help you to ensure that you spot any errors or signs of identity theft before either does any serious damage, and it can also help to give you an idea of the general state of your credit profile. It’s an important practice to keep up with, so don’t let it slide!

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.

[1] https://www.annualcreditreport.com/index.action

Posted in: Credit Score