March is National Credit Education Month which means it’s the perfect time to take charge of your credit health and give it a checkup. That starts with understanding the ins and outs of your credit report. We’ll guide you through what you need to know, how to spot and correct errors, and offer tips on maintaining good credit habits.
What is a credit report?
A consumer credit report is a detailed summary of your credit history. It includes your personal information (name, address, DOB, SSN) and a record of your credit accounts, the type of account (credit card, loan, etc.), account numbers, credit limits or loan amounts, current balances, and, most importantly, your payment history (on time payments, late payments, and missed payments). Public records, such as bankruptcies, liens, and judgments, are also included. The report also lists inquiries, detailing who has accessed your credit report.
Your credit report is used to determine your credit score. This is a three-digit number that summarizes your creditworthiness – essentially, a measure of your ability and willingness to repay borrowed money. Credit scores are typically broken down into five ranges: poor, fair, good, very good, and excellent. Each credit-scoring company has its own ranges, but they generally follow a similar pattern:
- Poor: 300–579
- Fair: 580–669
- Good: 670–739
- Very good: 740–799
- Excellent: 800–850
Why is your credit report important?
Your credit report and credit score are important because they are used by lenders to determine your eligibility for loans and credit cards and the interest rates you’ll be offered. The higher your credit score is, the easier it will be to qualify for credit and the less expensive it will be.
Beyond lending, a good credit report can be a deciding factor when renting an apartment, as many landlords check credit histories as part of their tenant screening process. In some cases, it can even affect your job prospects. Certain employers (particularly those in sensitive industries) may check credit reports during background checks.
Your creditworthiness can also influence your insurance premiums, with better credit often leading to lower costs for things like auto and homeowners insurance. Ultimately, a good credit report contributes to your overall financial well-being by providing greater financial flexibility and making it easier and less expensive to access credit when needed.
How to obtain your credit report
It’s important to keep an eye on your credit report so you know what your credit score is, and to spot any mistakes. Your credit report is maintained by three main credit bureaus: Equifax, Experian, and TransUnion. Since each bureau works independently, the information on your report might vary slightly between them.
The Fair Credit Reporting Act (FCRA) is a federal law that protects your credit information and gives you important rights like accessing your credit report, disputing mistakes, and controlling who can see your information. The FCRA also guarantees you a free credit report from each of the three bureaus annually. You can get these free reports at AnnualCreditReport.com, a website set up by the bureaus.
Credit monitoring services also provide access to your reports and scores.
Many companies (like banks, credit unions, identity theft protection companies, FinTech companies etc) include credit report access in their membership packages and bundled them with other helpful features like credit score tracking and alerts for changes to your report. These services provide ongoing monitoring of your credit status, enabling you to quickly identify and address any errors or unusual activity.
How to read and understand your credit report
Credit reports can seem confusing at first glance, but understanding them is key to managing your financial health and improving your financial literacy. Here’s a step-by-step guide to help you read your credit report:
1. Personal Information:
- Where to find it: This section is usually at the very beginning of your credit report.
- What to look for: Verify that all the information is accurate. This includes your full name, current and past addresses, date of birth, and Social Security number.
- Why it matters: Inaccurate personal information can lead to your credit history being mixed up with someone else’s. If you find errors, report them to the credit bureau immediately.
2. Account details:
Where to find it: This is typically the largest section of your report. What to look for: For each credit account (credit cards, loans, etc.), you’ll see details like:
- Account name and number: Identifies the specific account.
- Type of account: Credit card, installment loan, line of credit, etc.
- Credit limit (or original loan amount): The maximum you can borrow or the initial loan size.
- Current balance: How much you currently owe.
- Payment history: On-time payments, late payments, missed payments, and defaults will be noted here.
- Utilization ratio: This is the percentage of your available credit that you’re currently using. It’s calculated as (Current Balance / Credit Limit) x 100. For example, a $200 balance on a card with a $1000 limit is a 20% utilization ratio.
Why it matters: Payment history is the biggest factor affecting your credit score, so if there are errors it’s important to get them corrected. Low credit utilization is also important. Aim to keep your utilization below 30% for each card, and ideally lower.
3. Public records:
- Where to find it: This section is usually separate from your account details.
- What to look for: This section might contain bankruptcies, liens, and court judgments.
- Why it matters: These entries are serious negative marks on your credit report and can significantly lower your credit score.
4. Inquiries:
- Where to find it: This section lists who has accessed your credit report.
- What to look for: You’ll see a list of “hard inquiries” which happen when you apply for credit (these can slightly lower your credit score) and “soft inquiries” which are for informational purposes, like pre-approved offers (these do not impact your credit score).
- Why it matters: Too many hard inquiries in a short period can be a red flag for lenders. Soft inquiries don’t affect your credit score.
Carefully reviewing each section of your credit report regularly lets you monitor your credit health, identify areas for improvement, and dispute any inaccuracies you find with the credit bureau promptly.
What to do if you find errors
If you find errors on your credit report, take action and dispute the error quickly since mistakes can negatively impact your credit score, or may alert you to identity theft. Here’s a breakdown of how to dispute errors on your credit report:
1. Check all three credit reports
If you find an error on one report, check to see if it also shows up on your report from the other credit bureaus. Each agency collects and reports information independently, so some reports may be inaccurate while others aren’t. If you spot an error on multiple reports, you’ll need to make a separate dispute with each bureau.
2. Gather documentation
Before you begin the dispute process, collect all relevant documentation that supports your claim. This might include:
- Copies of your credit report highlighting the error.
- Account statements showing correct payment history.
- Correspondence with creditors.
- Police report or FTC identity theft report
- Any other documents that can help prove your case.
3. Write a dispute letter
Write a clear and concise dispute letter to either the credit bureaus or the data furnisher (the company that provided the inaccurate information on your credit report). In the letter include the following information:
- Your full name, address, date of birth, and Social Security number.
- The specific error you’re disputing, including the name of the creditor and the account number.
- A clear explanation of why you believe the information is inaccurate.
- Copies of your supporting documentation (never send originals).
- A request that the error be corrected.
4. Send the dispute letter
Send your dispute letter via certified mail with a return receipt requested. This provides proof that the credit bureau received your letter. Keep a copy of the letter and all supporting documents for your records. You can also often submit disputes online through the credit bureau’s website.
The organization you contact has 30 days to respond. If you haven’t heard back within this timeframe, follow up with them to check on the status of your dispute.
Maintaining a healthy credit report
Maintaining a good credit report takes consistent, responsible financial habits.The good news is if you don’t have good credit, or if you are just starting out and trying to establish credit for the first time, there are steps you can take to rebuild and improve your score.
Always pay your bills on time, as even one missed payment can hurt your credit score. Keep your credit card balances low—ideally below 30% of your credit limit since your credit utilization ratio also affects your score. Also, avoid opening too many credit accounts at once. This can be a red flag for lenders and counts as a “hard inquiry” which can ding your credit score. Be mindful of your debt-to-income ratio, and regularly check your credit reports for any errors.
Stay consistent beyond Credit Education Month
Just like an annual check-up is vital for your physical health, a regular review of your credit report is essential for your financial well-being. You’ll have a better understanding of your creditworthiness, what you can do to improve your score, and spot any errors that might be bringing it down. Your credit health is in your hands – take charge this Credit Education Month and make it a priority.
