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Understanding credit reports

Updated on October 8, 2014

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credit cards
credit cards

Why you need to understand credit reports

The topic of credit reports has a lifetime impact on some of the most important milestones you will encounter; such as buying a house, applying for a car loan and even your application for employment. It is not just for financial gurus, it applies to everyone and is used by many sources around us.

Establishing credit begins when you first apply for credit cards, or open a bank account or set up time payment plans for a big purchase. A credit report tells the history of payments that you have made across all your various financial institutions and credit card issuers. It reflects how well you are paying off debts and how much credit you are using. It also reflects how many open credit accounts that you hold. For some young people, this initial step begins as a high school or college student, when they apply for their first credit or debit card. And that credit history follows you wherever you go in the future.

What are credit scores?

The range for credit scores is 300-850, the higher the score the better. And scores above 700 are considered good risks by lenders. A low score may lead you to being denied for a loan while a higher score will qualify you for the best interest rates on loans.

It is also important to know what determines credit scores.

There are five variables that go into the calculation of the score: payment history, length of credit history, type and number of credit cards used, amounts owed and new credit or inquiries. For example, improving your payment history with a current credit card issuer may have a better impact on your score than opening a new credit card.

The credit reporting agencies

There are three main agencies that report credit and they are:

1.Equifax

http://www.equifax.com/home/

2.Experian

http://www.experian.com/

3.TransUnion

http://www.transunion.com/

Getting a free report

Under the "FACT Act", amendment to the Fair Credit Reporting Act, you are entitled to one free credit report from each of the three main credit-reporting agencies during a 12-month period.

You can also obtain a free annual report online at:

www.annualcreditreport.com

It is important to review your credit report at least once a each year or more often if you suspect any financial fraud. It is helpful to verify that the report is accurate and also to make sure your don’t have an incident of fraud or identity theft. It is also important if you are applying for a home mortgage to review your credit status. Some major credit cards are now including your credit score on your monthly statements as another way to monitor.

Using the information to improve your financial profile

Think of your credit review as monitoring your credit "reputation". It is all about making sure that it reflects a good and accurate impression of you. It should also prompt you to review your budget and debts in order to establish your financial goals for the future. Consider the amount of debt that you currently have compared to your income. This is one of the ratios that loan officers will determine as you apply for a loan.

Most financial advisers will recommend that you pay off the debt with the highest interest rate first but if you need more guidance or have a complicated financial picture, seek out the assistance of a certified financial planner to conduct a full review including tax consequences.



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Credit report disputes

If your credit report is not accurate, each agency has a procedure for filing a dispute. For example you may need to submit a document (such as a cancelled check) to show the date regarding the payment of a debt. Or the agency may ask the source to verify your records and then will share the results of their investigation back with you. The credit agency is required to investigate the dispute within 30 days. Contact the credit agency for full instructions.

Remember that debts and financial obligations are still reported under your name even during a pending divorce.


Next steps

1. Order your current credit report from one of the credit agencies listed above.

2. Review your current credit score

3. Determine if your credit report is accurate

4. Set up a monthly budget and financial goals

5. Discuss your financial questions and goals with a certified financial planner

Credit reports help to prepare home buyers

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loans

Your credit experience

Have you ever had a credit dispute?

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    • Kathleen Grove profile image

      Kathleen Grove 3 years ago from Houston, Texas

      Very good advice.

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