How to Read a Credit Report
A credit report exposes you to your financial situation, which means that if you know how to read a credit report you will have a full understanding of your finances. Especially if you do not have an accounting background, reading a credit report might seem very impossible. However, it might actually be easier than you think with the tips and tricks offered in this article.
At the end of the day, you will discover that your credit report is basically just a detailed record of your credit history and is used to determine your credit score as well as other financial decisions by lenders and other parties. So how do you read it? Let’s find out together.
- What do The Numbers Mean on a Credit Report?
- What is a Credit Report
- How do You Read Your Credit Report?
- Why is my Credit Report Important?
- What Identifying Information is on a Credit Report?
What do The Numbers Mean on a Credit Report?
Your credit score is a number that represents the risk a lender takes when you borrow money. A FICO score is a well-known measure created by the Fair Isaac Corporation and used by credit agencies to indicate a borrower’s risk. Another credit score is the VantageScore, which was developed via a partnership among the top three credit reporting agencies: Equifax, TransUnion, and Experian.
Read Also: How a Credit Score is Calculated
Your credit score calculation represents your credit risk at a moment in time based on information found on your credit report. Both FICO and VantageScore range from 300 to 850, although the ways in which each parses its scores into different classifications vary. However, in both cases the higher the credit score, the lower the risk to the lender. FICO scores will be used for the purposes of this article.
Exceptional Credit Score: 800 to 850
Consumers with a credit score in the range of 740 to 850 are considered consistently responsible when it comes to managing their borrowing and are prime candidates to qualify for the lowest interest rates. However, the best scores are in the range of 800 to 850.
People with this score have a long history of no late payments, as well as low balances on credit cards. Consumers with excellent credit scores may receive lower interest rates on mortgages, credit cards, loans, and lines of credit because they are deemed to be at low risk of defaulting on their agreements. Having an excellent credit score is particularly useful for qualifying for a personal loan, as it typically more than makes up for a lack of collateral.
Very Good Credit Score: 740 to 799
A credit score between 740 and 799 indicates a consumer is generally financially responsible when it comes to money and credit management.3 Most of their payments, including loans, credit cards, utilities, and rental payments, are made on time. Credit card balances are relatively low compared with their credit account limits.
Good Credit Score: 670 to 739
Having a credit score between 670 and 739 places a borrower near or slightly above the average of U.S. consumers, as the national average FICO score is 711 as of October 2020.
While they may still earn competitive interest rates, they are unlikely to command the ideal rates of those in the two higher categories, and it may be harder for them to qualify for some types of credit. For instance, if a borrower is looking for an unsecured loan with this score, it’s vital that they shop around in order to find the options that best suit their needs with the fewest drawbacks.
Fair Credit Score: 580 to 669
Borrowers with credit scores ranging from 580 to 669 are thought to be in the “fair” category. They may have some dings on their credit history, but there are no major delinquencies. They are still likely to be extended credit by lenders but not at very competitive rates. Even if their options are limited, borrowers in need of financing can still find solid options for personal loans.
Poor Credit Score: Under 580
An individual with a score between 300 and 579 has a significantly damaged credit history.
This may be the result of multiple defaults on different credit products from several different lenders. However, a poor score may also be the result of a bankruptcy, which will remain on a credit record for seven years for Chapter 13 and 10 years for Chapter 11.
Borrowers with credit scores that fall in this range have very little chance of obtaining new credit. If your score falls in it, talk to a financial professional about steps to take to repair your credit. Additionally, so long as you can afford to pay a monthly fee, one of the best credit repair companies may be able to get the negative marks on your credit score removed for you. If you attempt to obtain an unsecured loan with this score, be sure to compare every lender you’re considering in order to determine the least risky options.
Everyone has to start somewhere. If you have a very low credit score (say, under 350), chances are you haven’t yet established any accounts and don’t have a credit history. Talk to your local lender about its borrowing requirements. When you’re approved for your first loan or credit card, set up a responsible repayment pattern immediately to establish a good credit record.
What is a Credit Report
As we have already mentioned above, a credit report is more like a report card for your credit history. It can be used by potential lenders to determine how risky it is to lend you money, which is basically just how likely you are to pay your monthly payments on time. Your credit report can tell them:
- The date you opened any credit accounts or took out any loans
- The current balance on each account
- Your payment history
- The credit limits and total loan amounts
- Any bankruptcies
- Your identifying information (name, address, Social Security number)
A credit bureau or credit-reporting company like Equifax, Experian or TransUnion will provide your information to whatever company may be considering giving you a loan or credit account. These bureaus all operate independently, so their reports may be slightly different depending on the information provided by the lenders they used.
How do You Read Your Credit Report?
While there may be minor differences in how each of your credit reports is organized, all three bureaus should provide accurate information in these five sections.
Your personal information will include your name (including former names and any aliases), your Social Security number, and birth date. Your report will include current and previous addresses and contact information like phone numbers and email addresses.
Note: Check for typos and incorrect identity information
Make sure that all the personal information included in your credit report is correct. Every part of your credit report needs to pertain to you: not your dependents, not your former spouse, and especially not a stranger with the same name.
A misspelled name (even just an incorrect middle initial), an address you don’t recognize, an errant digit in the Social Security Number or a phone number that isn’t yours are all indicators that your report may have been confused with someone else’s.
Your credit report will include current and previous employers. Employer history is sometimes included in the personal information section.
Note: Make sure you recognize all employers listed
Your employment history doesn’t affect your credit score since it has nothing to do with your credit or your debt. It’s included on your credit report to verify your identity, so finding incorrect information like company names you don’t recognize or employers you never worked for is a red flag.
Your credit history is the largest section of your credit report and the most important. Your FICO credit score is calculated with quite a few factors, including amounts owed (30 percent), the length of credit history (15 percent), new credit (10 percent) and credit mix (10 percent). But your payment history determines the majority of your credit score calculation (35 percent).
Since your credit history includes the most important pieces of data used to determine your credit score, you’ll need to spend time carefully checking for errors in this section of the report.
The credit history of your credit report will include the following components:
- Current and closed accounts from the past seven to 10 years. This includes individual accounts, joint accounts and ones where you’re listed as an authorized user. You’ll see revolving credit, like credit cards and home equity lines of credit, as well as installment loans, like student loans, auto loans, or mortgages.
- Payment history. This is a record of all your payments, particularly whether or not minimum payments were made on time. Negative accounts will show any payments that are missed. Past-due amounts may be reported as 30, 60, 90, 120 or 150 days late.
- Current balances. This includes the current balance when the issuer reported to the bureau and the highest ever balance on the account.
- Names of creditors and lenders. Every account listed will include the name of the lender or creditor and the date when it was opened. Credit reports don’t include specific information about individual purchases.
- Credit limits or loan amounts. The current credit limit for revolving accounts and the original loan amount for any fixed installment accounts.
- Account opening and/or closing dates
- Account status. You may see accounts listed as open, closed, paid, refinanced, transferred or foreclosed. Some accounts may be marked as charged off, which is when a debt is between 90 and 180 days past due and considered delinquent.
Even after you’ve closed an account or paid off a loan, the accounts will appear in your credit history for a period of time. Negative credit information — including late payments, delinquent loans and charged off loans and accounts — can remain on your credit report for seven years. Credit information about closed accounts in good standing will disappear from your credit report after 10 years.
Note: Carefully review all account details, particularly payment history
Carefully scrutinize your credit history to check that the account number, account name, balance amount, payment history, payment due date and payment status are all correct.
Check to make sure that the account’s current credit limits or original loan amounts are correct. If the credit limit listed is lower than the one you actually have, it may hurt your credit utilization, which in turn impacts your credit score.
Other potential errors in this section include:
- Closed accounts reported as open
- Open accounts erroneously reported as delinquent
- Accounts in good standing incorrectly reported delinquent
- Payments reported as late when you paid them on time
- Incorrect dates: date account opened and/or closed, last payment or first delinquent payment
- The same account listed multiple times under the names of different creditors (this can happen with delinquent accounts or accounts sent to collections)
- Open accounts reporting you as the owner when you are an authorized user
Make sure that every account listed belongs to you. If you don’t recognize an issuer, discover an account you didn’t open, find an incorrect balance, or discover another problem, you need to dispute the error. One credit report explanation could be outdated information, but incorrect account information can also be a red flag for identity fraud.
Public records related to debt will be included in your report. These could include bankruptcies, foreclosures, and repossession. Public records stay on your report for seven years with one exception: Chapter 7 bankruptcy will stay on your report for 10 years.
All of these can hurt your credit score because they show a pattern of serious delinquency. This section does not include arrests, lawsuits, divorces or unaffiliated infractions with the law, like speeding tickets.
Note: Public records can seriously impact your financial prospects
If your credit report has a public record included, you may need to submit a credit report explanation to lenders to explain why there’s a negative item to your report.
Any public record included on a credit report must include your name, address, Social Security number or date of birth and must be verified with a courthouse visit at least every 90 days. Make sure the public record pertains to you with the correct name, date of birth, address, and personal information included.
Tax liens no longer affect your credit, so you shouldn’t find property tax liens, income tax liens, federal and state tax liens or civil judgments on your report. If you find a tax lien on your credit report, you need to dispute the error with the credit bureaus.
A credit inquiry is a record on your credit report that shows who accessed your information and when. There are two types of credit inquiries:
- Soft inquiries happen when you check your own credit. Soft inquiries, also known as soft credit checks, also happen when current creditors check your account or when other companies plan to send pre-approved offers.
- Hard inquiries are more serious. These appear when lenders check your credit when you apply for new credit cards, credit card limit increases, loans or mortgages. Hard inquiries also happen when a collection agency is trying to locate you.
While soft inquiries do not affect your credit score, each hard inquiry usually drops your credit score by a few points. Hard inquiries matter because they can indicate an increased risk to lenders as they wonder why you want or need more credit.
Note: Hard inquiries can lower your credit score or be a sign of identity theft
If you notice an inquiry you don’t recognize, it could indicate identity theft. However, it’s possible that an unfamiliar credit inquiry on your report could be the result of multiple potential lenders pulling your report after you apply for a loan or mortgage. That said, issuers typically consider similar closely-timed inquiries as a single inquiry if they happen within a certain time frame (usually 45 days or less).
Check the dates of all inquiries listed as they should be removed after two years. You can always file a dispute and request a hard inquiry removal.
Why is my Credit Report Important?
Credit reports are an important snapshot of your financial health. Credit can make or break your chances at a mortgage and influences what kind of credit cards, insurances, and interest rates you qualify for.
Having good credit can make it easier for banks and lenders to say yes to your credit applications, and you’re more likely to be offered lower interest rates or better loan conditions, like a low fixed-rate mortgage or a higher credit limit on a card. With good credit, landlords are more likely to rent you an apartment.
Bad credit means that you’re limited to fewer credit card options, you’ll miss out on the benefits that come with the best credit cards, and you’re likely to have higher interest rates and higher insurance premiums. Bad credit could mean being turned down for a rental, having to make a larger upfront payment or taking on a co-signer with good credit. A bad credit score can even affect your love life: one Bankrate survey found that 4 in 10 Americans might swipe left after knowing someone’s credit score.
Understanding your credit report helps you know where you stand so you can work on building your credit score. Regularly reviewing your credit report at least once a year also gives you a chance to correct any errors to make sure your credit report is an accurate representation of your financial situation.
You should get into the habit of checking your credit report for errors that could hurt your credit score or indicate identity theft. Potential errors include:
- Unfamiliar accounts and account numbers you don’t recognize
- Addresses you’ve never lived at
- Former spouses listed on credit cards, loans and bank accounts
- Incorrect reporting of account status, such as accounts incorrectly reported as late or delinquent
- Gather relevant documents to dispute credit report errors
Since disputes are reviewed on a case-by-case basis, you’ll need to provide documentation to support your claim. You will need to provide proof of your identity, including your Social Security number, date of birth and a copy of your ID (like your driver’s license or passport). Depending on the specific error, you may need to submit copies of documents to support your case, which could include bank and credit card statements, loans or death certificates.
What Identifying Information is on a Credit Report?
The typical credit report will include personal identifying information: a list of credit accounts (including credit limit), type of account (credit card, mortgage, auto loan, etc.), and your payment history on those accounts.
The three major credit bureaus – Experian, Equifax and TransUnion – compile data from sources that extend you credit. Bits and pieces of your credit history may vary slightly among the three companies because not all businesses supply information to all three agencies. However, the broad picture of your credit history should be relatively consistent.
Read Also: How to Build Good Credit
Each credit report has four basic categories: identity, existing credit information, public records and recent inquiries.
Here’s how they break down:
- Identity: You are identified by name, date of birth, social security number, current and previous addresses, phone numbers and employment.
- Existing Credit Information: This includes detailed information about any credit accounts (credit cards, mortgages and loans) you have.
- When each account was opened
- Your credit limit or loan total
- Co-signer information
- Recent account balance
- Highest account balance
- Monthly payment
- Recent payment
- All or part of your account numbers
- Closed Accounts: Credit information about closed accounts remain on your credit report for 10 years. An exception is negative accounts, which are removed after 7 years.
- Payment History: The most important information is the payment history, which determines 35% of a FICO score. This is a two-year record of account statuses (paid/past due), missed payments stay on the report for seven years. Information about how much was owed and how late the payment was also is included.
- Public Records: This information is generated from transactions recorded by local, state and federal governments. It can include property purchases, liens, bankruptcies, foreclosures, court judgments and divorces. A completed Chapter 13 bankruptcy stays on your credit report for seven years; a completed Chapter 7 stays for a decade; criminal convictions may remain on it indefinitely.
- Credit Inquiries: This is a list of companies and individuals who requested a copy of the report in the past two years. Inquiries are listed as voluntary or involuntary depending on whether your actions created the inquiry. For example, a voluntary inquiry would be an application for a credit card. An involuntary inquiry would be if a lender pre-approved you for a credit card.
Knowing how to read your credit report helps you understand how to improve your credit and maintain a healthy credit score. You need to monitor your credit reports regularly to catch potential identity theft and fraud. When you understand why it’s important to check your credit report and understand how to read a credit report, you can make more informed decisions about your spending and behavior as a borrower.