June 28th, 2017
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Your Credit Report
Your Credit Report
According to Investorwords.com, a credit report is defined as, "A report containing detailed information on a person's credit history, including identifying information, credit accounts and loans, bankruptcies and late payments, and recent inquiries. It can be obtained by prospective lenders with the borrower's permission, to determine his or her creditworthiness."
In layman's terms, this simply means the information on you credit report is used by a lender to determine if they want to give you money. Because the majority of your credit report directly relates to current outstanding loans, if the information found on your credit report is favorable, lenders are more inclined to approve you for a loan, than if it reflects a poor repayment history.
For reference, a sample credit report can be found here.
Sections of Your Credit Report
Credit reports are divided into four sections, each of which provide different information to a prospective lender. These four parts are:
1) Identifying Personal Information - This section will contain basic personal information about you, including your name, current and previous addresses, date of birth, social security number, in addition to current and previous employers.
2) Your Credit History - This is the largest portion of your credit report, and contains an exhaustive list of all credit lines in your name, whether open or closed. In addition to the bank's name, this section will also outline the total amount of credit available on the account, balances, and payment history. If you've ever been late on repayment or have defaulted altogether, this is where the activity will be shown.
3) Credit Inquiries - A credit inquiry occurs when an individual or third party accesses the information found in a credit report. There are two types of credit inquiries; soft inquiries, and hard inquiries. Soft inquiries occur when an individual requests access to their own credit report, and hard inquiries occur when a third party accesses an individual's credit report in order to determine creditworthiness. Soft inquires do not affect credit score, while too many hard inquires can cause an individual's score to dip.
4) Public Records About You - While the above sections will be filled with information, the Public Records portion is one that you want to be completely blank. This segment is devoted solely to reporting negative factors about an individual's credit history, including bankruptcies, information reported from debt collection companies, foreclosures, lawsuits, liens, wage attachments, and even arrests.
The Important of Checking Your Credit Report
Since your credit report is fundamental to obtaining lines of credit, it's important that you order your credit report on an annual basis in order to check for errors. It's not uncommon for an individual's name to be spelled incorrectly, or for the report to show closed accounts as still active. In fact, nearly 30% of all credit reports contain errors, so it's very likely yours does too.
According to a 2003 update to The Fair Credit Reporting Act, all consumers are entitled to a free yearly credit report from all three reporting agencies, which allows those who do not wish to pay for their report to have access. This free credit report can be ordered directly through www.annualcreditreport.com, which is the only source authorized by the U.S. Federal Trade Commission. If you find that your credit report contains errors, you will need to contact the three reporting agencies immediately in order to have them corrected.
However, many financial professionals suggest constantly monitoring your credit report, which is a service offered by numerous online companies, who will notify you any time your credit score changes.
In addition to checking your credit report for errors, it's also a good idea to review it for any suspicious activity, which could be the result of identity theft. But identity theft couldn't possibly happen to you, right? According to Javelin Research and Strategy, in 2011, identity fraud increased a total of 13 percent, and affected more than 11 million people nationwide. To put this in perspective, this means someone in the U.S. has their identity stolen once every three seconds.
In addition to signing up for a credit monitoring service, it is also suggested that consumers enroll in an identity theft protection service, which are often offered by the same companies. Consumers concerned with identity fraud can also contact the credit reporting agencies to have a freeze placed on their account, which does not allow any information to be released without prior acknowledgement from the consumer.
Credit Report Vs. Credit Score
If an individual is unfamiliar with the credit report process, they may reasonably assume that it will contain their credit score (also known as a FICO score). However, this is not the case.
First, a word about credit score. In the United States, there are three main credit reporting agencies; Experian, TransUnion, and Equifax. The role these companies play is to utilize the information found in your credit report in order to derive your credit score. Anyone who has ever ordered their credit score from all three bureaus will likely have noticed that their score may differ slightly between the three. The reason for this is that each of the three companies use slightly different privately held calculations when determining your score.
After the information in your credit report is whittled down, your credit score will appear as a three-digit number ranging anywhere from 300 to 850. A higher number reflects that the individual is likely a good credit risk, and a lower score typically represents the individual as a poor credit risk. Because any changes on your credit report can have an impact on your credit score, it becomes doubly important that you check them regularly.
Even though the Fair Credit Reporting Act stipulates that individual's can access a complementary credit report every year, this does not include their credit score. In order to obtain this, a consumer will need to pay a small fee.
A Final Note About Credit Reports
A credit report ultimately affects most financial decisions a consumer will make throughout their lifetime. Unless an individual plans to pay cash for all their purchases, they will be required to have a positive credit report in order to obtain lines of credits, home mortgages, and many other types of loans. In other words, without a positive credit report, you may be wading in the financial deep end without a life preserver.
Because of this, it's of the utmost importance that you know and understand the information found on your credit report. Not only that, but it's also important for all consumers to take it one step further and understand their credit score as well.