What is a Credit Report and Why is it Important?

what is a credit report and why is it important

Your credit report is, as simple as it sounds, a report of your credit history. Your credit history starts from the age of 18 and exists for as long as you do. Everything you do, as far as credit goes, good and bad, will appear on this snapshot of your credit history.

What Are Credit Reporting Agencies and How Do They Work?

Credit Reporting Agencies (CRA’s) are more often called “Credit Bureaus.” These CRA’s are:

  1. Equifax
  2. Experian
  3. TransUnion

While these companies are all different from each other, they all work in a similar way. Each month they receive data from creditors and collection agencies regarding positive and negative accounts, as well as any changes that were made from the previous month (ie, on-time payments, accounts paid off, late payments, chargeoff’s, defaulted loans, etc).

These CRA’s also use ‘credit scores’ to attempt to show the type of consumer you are, based on your credit history. This means that the score will reflect your credit reporting history, as far as the good and bad credit you have obtained throughout that time. This can be used for risk mitigation and to determine whether or not you may be a good or bad match for that creditor and the credit that you are attempting to get approved for.

Your credit report can show a lot of different types of information, such as the fallowing:

  • Cover Page
  • Your Personal information, such as name, date of birth, social security number, current and (if applicable) previous addresses that you lived at, as well as your employer(s) (current and past).
  • Inquiries – when you applied for credit or when a company pulled your report (soft pull) to see if you qualify for ‘pre-qualified’ credit cards, etc.
  • Accounts – these can be positive or negative items that appear on your account, so be sure to look them over and see if there’s anything negative so that you can verify whether or not they belong to you. Click here to learn how to dispute negative items. Technically, I only listed ‘accounts’ to explain a bit more about them. All negative items would be considered accounts, but so would positive items (if applicable). This can also be revolving credit (credit cards), auto loans, home loan(s), personal loan(s), etc. You can find out the creditor or collection agency name under each account, as well as the open and, if applicable, close date. You will also see terms/payment responsibility, balance(s), status and history, comments, etc.

This information can be inaccurate, which is why you should pull your own credit report a few times per year, at least. In fact, if you find a lot of inaccuracies when you pull your credit report the first time — it’s probably wise to check out one of the many credit monitoring services that exist. Identity Theft is rampant these days, especially with the world wide web, which means that you could have already been a victim or may be a victim in the future. Monitoring your credit report is a smart thing to do.

In fact, in a study conducted by the FTC in 2012, it was said that 5% of consumers have inaccuracies reported on their credit reports, whereas other studies claim that the rate is much higher.

[source: http://www.ftc.gov/os/2013/02/130211factareport.pdf]

How Do These Items Get Reported?

Good and Bad credit information (items) are reported on a monthly basis by the creditor(s) of your loan(s) or the collection agencies that purchase the data of the loan that the creditor felt that they could not collect on (ie, you stopped paying your bills, so they closed the account and sold the data to the CA).

This information is sent to the CRA’s (Credit Reporting Agencies) each month via a monitoring system and is updated to your report (each month).

How Do I Remove Negative Items?

There’s several ways to remove these negative items from your credit report.

1. Negotiate and pay the creditor or collection agency if they remove the item(s) from your report.

2. Dispute any errors/inaccuracies with the CRA’s (Credit Reporting Agencies; these are TransUnion, Experian and Equifax) to remove them from your report.

If you choose to pay them off, then it’s in your best interest to attempt to negotiate a payment or payment plan to pay off the amount ASAP, as long as they agree to remove the negative item(s) from your credit report. This is important, otherwise it’s still going to affect you, even after you’ve paid your balance off.

Most people choose to fight inaccuracies and will go that route. While that’s beyond the scope of this article, there are 2 links above that will explain how to do this. It’s not that difficult, but it does require a bit of time and patience, especially if you have a lot of negative items being reported!

Why Do Credit Reports Matter?

Everyone needs good credit these days. I’m sure you may think that you don’t, because maybe you haven’t needed it yet, but you will eventually realize that you do need it one day.

Most people understand that everything runs off of credit, even our own country. However, credit can be good and bad. Credit Reports can help you better appreciate your credit status and better prepare you for the future. By monitoring your credit, you will be able to keep tabs on what’s being reported, who is viewing your credit and clean up any inaccuracies.

How Can I See My Credit Report?

This is the easy part (usually). If you haven’t already been, head on over to AnnualCreditReport.com and you can receive your free credit report from all 3 CRA’s. This is part of the Fair Credit Reporting Act which entitles all American consumers the ability to view their own credit report for free, each year.

Note: you can receive your report at their website or by phone or mail. From their website:

If free credit reports are available in your state through the Annual Credit Report Request Service, you can request a free annual credit report by phone or mail and it will be mailed within 15 days. However, you can receive a report immediately by using this secure website. Click on this link to find information on how to request a free annual credit report by phone or mail. Deaf and hard of hearing consumers can access our TDD service by calling 7-1-1 and referring the Relay Operator to 1-800-821-7232.

If you’ve already used up your free credit there are still ways to view your report. For instance, if you’ve been denied credit from a company — you are entitled to find out why, which means you can request your credit report from that credit bureau so that you can figure out what has caused you to be denied. This is also the case for insurance or employment, so keep that in mind if you’ve been denied any of those.

If you’re currently out of employment and looking for a job within the next 60 days — you are also entitled to receive your credit report so that you can attempt to fix any negative issues that may cause you to be denied.

If you’ve recently been a victim of identity theft you can also get your credit report for free.

While those are just a few ways that allow you to receive your credit report for free, there’s also other reasons, such as being on welfare, having credit “changes” (higher rates, lower credit limits on your current account(s), etc) allow you to receive one also.

If none of the above are relevant to your current situation, you can also pay to receive your credit reports from the CRA’s or via credit monitoring services such as MyFICO or FreeCreditScore. While I’m not suggesting using these in particular, nor am I endorsing these companies, they’re names you may be more familiar with.