Your Credit Report: Why It's Important to Know What's On It

Understand How To Protect and Leverage Your Credit Score

credit score and report

Did you know that your purchasing and payment habits are tracked by your bank, credit card companies, department stores, and other creditors and reported to credit bureaus so potential lenders can decide whether they want to take the risk of lending you money or issuing you credit? These bureaus also collect such information as your job history and whether you own your home. The better you understand your credit report and score, the better chance you have of leveraging your credit to secure financing for major purchases.

Why is it important to know what's on your credit report?

For one thing, if you're thinking about buying a house or applying for credit for any other big purchase, you'll need a clean credit report, and it's always best to know what's on it before your lender does. This will give you an opportunity to clean up any discrepancies or errors, which are fairly common, and which can throw a monkey wrench in the works if not resolved.

Ideally, you should check your credit report with each of the three credit bureaus, Equifax, TransUnion, and Experian, once a year or so. You're entitled by law to one free copy of your credit report from each of these three credit bureaus once a year. You can get all three at once or you can spread them out over the year. If you order copies more frequently than that, each report will cost around $10 and in some states considerably less. You can also opt to order a three credit bureau report, usually under $40, that will list your credit report and score for all three agencies on a single report.

If you've been turned down for credit in the last 60 days because of something a lender saw on your credit report, you can obtain a copy of your report free of charge. Lenders are required by law to notify you of this right if they deny you credit.

When you get your credit reports, review them carefully to make sure all the loans and credit accounts listed really belong to you, and that all the accounts listed as open are actually current loans or balances.

If a loan you've paid off or a credit card that was cancelled is still listed as open, contact the credit bureau and ask for your report to be corrected.

Usually the credit report you obtain from the credit bureau will include a form for reporting any inaccuracies. If you requested an online version or credit report, most agencies have a dispute center where you can submit your request online to dispute credit report errors. Give as much detail as possible. If you have documents that back up your claim, provide copies. By law, the credit bureau must investigate your claim. However, even if they decide your report is accurate as it stands, you should continue to try to correct the report by writing a letter explaining your side of the story (not to exceed 100 words), which the bureau is required to provide to anyone requesting your credit report.

Important Factors on Your Credit Report

When deciding whether to approve credit, lenders take the following into consideration:

  • Your payment history. Do you pay bills on time?
  • Have you had a bill referred to a collection agency?
  • Have you ever declared bankruptcy?
  • How much debt do you have outstanding compared to your credit limits? The closer your debt is to your credit limit, the less favorable.
  • How long is your credit history? If you haven't had much of a credit history yet, prompt payments are even more important.
  • Have you applied for more credit lately? Too many applications for credit has a negative impact on your chances for approval.
  • How many credit accounts do you have? Too many is considered a negative.

Information is retained in your credit report for seven to ten years. If you have negative items in your history, you can gradually repair your credit by consistently paying your bills on time from now on, paying down your balances, and not taking on any new debt. Lenders will take your improved record into consideration when deciding whether to approve credit, especially if you've been paying on time for at least a year.

By taking these factors into account, you can gradually improve your score to be in good standing.

This will make you more desirable to lenders for personal financing options such as home loans or car loans, or even if you are using your personal credit to apply for a business loan.