Learning to read a credit report is one of the most important and basic financial skills that everyone should know once they are gainfully employed and have begun to accrue debts. Whether for good or ill, your credit score is the key to many important things in life, and protecting a good score always starts with knowing your score and how it got to be the number that it is. Learning this information starts with learning how to read and interpret a credit report. Although in years past acquiring a credit report used to be somewhat difficult, as of 2003, the Fair and Accurate Credit Transactions (FACT) Act was passed as an amendment to the Fair Credit Reporting Act, entitling every US citizen to a free credit report once every 12 months.
While there will always be some information on your credit score that you won’t completely understand, knowing how to digest the important data and ignore the rest is absolutely vital to financial success. Also, knowing the nuanced differences among the three main credit reports, as well as how and how often you should order a credit report is just as important. Here are a few jargon-free tips that will help get you started, so that even the most financially ignorant among us can figure out this important document.
Although there are three different credit reports, each processed and provided by the three main credit bureaus — Equifax, Experian, and Trans Union — all credit reports contain a few basic groups of information that enable you to understand where you stand in terms of credit. Here’s the meat of most credit reports:
This section of your credit report contains standard information that can be found on virtually all formal documents of this kind. For example, a typical personal information section on a credit report will display your full name, your date and year of birth, your current address, your current (and occasionally past) place of employment, and part of your social security number. Some reports include spouse names, driver’s license numbers, telephone numbers, and previous addresses. Although this is the most standard and easy to read section of your credit report, it is very important to read this information carefully, checking for errors, because even the smallest error, like a misspelled name or an incorrect address, could end up affecting your credit score in one way or another.
The next basic section found on all credit reports is a listing of your credit history by account. Separate accounts are sometimes referred to as “trade lines.” Every account listed will be printed with predictable bits of information — you’ll see the name of the creditor, the account number (blotted out or scrambled to protect your security), the number of accounts per creditor, the kind of credit it is (i.e. revolving or installment), other names that may be associated with the account, as in the case of a spouse, the credit limit, highest balance, or, in the case of a loan, the total amount of the loan. The most important part listed in this section is the total amount that you owe currently and how much you pay on a monthly basis. The status of the account is also listed, noting whether it is inactive, closed, paid off, etc. Credit reports typically include how well you’ve paid the account, noting whether you’ve been consistently late on payments.
While many financial advice blogs will go into the little details that could possibly ruin your credit score, one of the biggest hits you can possibly take is if you have anything listed under public records. While the public records section does not contain any previous criminal activity, such as arrests, it does contain anything related to finance that is up for public viewing, like tax liens, bankruptcies, or any other court or tax board judgments against you. All judgments stay on your report for seven years, whereas bankruptcies stay on your report for ten years.
One way to inadvertently kill your credit score is to have or to seek too many inquiries into your credit, which is contained in the final section of your credit report. Credit report inquiries are divided into two categories—hard and soft. A hard inquiry is when any lender or creditor requests an inquiry into your credit to determine whether or not you are creditworthy. Another situation that would fit the “hard” inquiry category would be applying for credit from several sources at the same time, which raises red flags and drops your score. However, if you are looking around for different rates on a specific type of loan or credit, like, say a mortgage, you’d probably have several hard inquiries listed. As long as you inquire during a short time period (i.e. a month) these inquiries won’t count against you.
While there aren’t extreme differences among credit reports, it is very helpful to acquire a report from all three credit bureaus. Here are a few things to watch out for as you read each credit report from the three different credit bureaus.
Experian may be one of the easier reports to read, as the report does not contain any obscure abbreviations, and it is very consumer-friendly in that it gives “status details” for each account. For example, if you have finished paying off an account, the report will tell you how long it will be on record. If you failed to pay off an account that went to collections and was written off, then it likewise gives details about how long your report will be blemished with this item. The Experian report also contains a balance history for each account, informing you of your highest balance over different time frames, as well as your most recent balance. A sample Experian report is available here.
One advantage that makes Equifax user-friendly is that it groups accounts by “Open Accounts” and “Closed Accounts,” whereas the other two credit reports group accounts in alphabetical order, making it much more difficult to quickly view what accounts you have to worry about. Another feature of the Equifax report is that it displays 81 months of credit history on your credit accounts, giving you a thorough understanding of how your accounts have progressed (or regressed, as the case may be). To check out a sample Equifax report, look here.
What distinguishes the Trans Union credit report from other credit reports is that it contains the most thorough and up-to-date employment history record, one that is easily correctible. Even though your employment history won’t hurt or help your credit score, the reason that the employment section on the Trans Union report is helpful is that it will show up when creditors are deciding whether or not to secure you a loan. Having a solid employment history definitely comes in handy in this respect. For consumers who are more visually oriented, the Trans Union report offers color coding on your accounts so you can easily discern which accounts have been paid off, which ones may be late, and which ones have been written off entirely. A sample Trans Union report can be found here.
Even the tiniest error on your credit report could spell trouble for your overall score. As such, it is extremely important that you familiarize yourself with the ins and outs of reading credit reports. Afterwards check through each credit report from each credit bureau to insure that all information is correct, down to your contact information and employer information. If you do find an error, then fill out the included form that enables consumers to report the mistake and get it fixed. Although fixing mistakes on your credit report can turn into a bureaucratic hassle, it’s well worth sending in that form and following up to ensure your highest possible credit score.