Your credit report is your financial report card. Since it can affect so many areas of your life, including whether you can qualify for a home or car loan, or get a job, it makes sense to understand how credit reports work.
What's in a Credit Report?
Yes, a credit report contains information about your credit activity and current credit situation such as loan paying history and the status of your credit accounts, but it also contains other information that is important for you to review.
- Identifying information - Periodically, it's important to review to make sure your name, address, and place of employment are all correct.
- Account History - This is the biggest section on your credit report. It has information about each of your credit accounts, including how you've paid. There are a lot of details, but it's important to review this section carefully to make sure things are accurate.
- Public Records - This section includes negative financial information like bankruptcies, lawsuit judgments, and tax liens. These can have a negative impact on your credit, so it's good to keep this section empty.
- Credit Inquiries - This section lists everyone who's accessed your credit report in the past two years. There are “hard” inquiries, which refer to inquiries made by a lender to approve a credit application, and "soft" inquiries, which are those made by businesses for promotional purposes. When potential lenders check your credit report, they'll only see the hard inquiries.
Because your credit report is specifically focused on your credit, you won't find criminal, medical or personal financial bank information in your credit report.
Your Credit Score
If your credit report is “War and Peace”, your credit score is the cliff notes. This 3-digit number gives lenders a quick, objective way to measure your credit risk. Scores range from 300 to 850, and the higher it is, the better. If your score is over 740, you can qualify for some terrific rates.
Your credit score takes five things into account:
- Your payment history (do you pay your bills on time?)
- Length of credit history (having some older accounts shows you have good experience with credit)
- Newly acquired credit (opening too many new accounts in a short time can be a red flag to lenders)
- Types of credit used (having both revolving and installment loans shows you have experience)
- Amounts owed (how big are your balances?)
FICO is considered the global standard of ranking credit risk.
Order your free credit report
Keep your credit safe by ordering free reports from these major agencies. It's important to understand how to read your report and better understand your FICO score, and report discrepancies that may prove harmful.
Visit annualcreditreport.com to order your free credit report
Grow your credit knowledge
While credit reports are free, you'll have to pay to see your credit score. Knowing you score can be worth every penny in terms of getting a sense of how lenders see you. It's good to check out your score before you make a big purchase, like a home. Go to www.myfico.com to get your score. You can also subscribe to their service, and receive updates on changes to your credit report, as reported to the top three credit reporting agencies.
Boost your credit score
If your credit score isn't where you want it to be, there are things you can do to improve it. For starters, pay your bills on time. Automatic bill-paying or marking due dates down on your calendar may be helpful.
Don't apply for credit frequently. It can be tempting, especially when the salesperson is offering a discount on those pants if you open a credit card with the store. But try to stay vigilant and open new accounts sparingly.
Reducing your credit card balances is another way to improve your score. Try to pay more than the minimum owed and before long you'll have made a real dent in your debt.
Maintain, build and rebuild
The best way to keep a healthy credit score is to use credit wisely and avoid excessive debt. Before you pull the trigger on a loan or put a big purchase on a credit card, remember that the information about how you pay off that loan or purchase will stay on your report for seven years. Is it worth it?
Also, assess needs versus wants. Spending, and over-spending, are complex issues that are often tied to emotional factors. Do you really need the thing you're about to put on a credit card or can you get by without it?
Finally, take the 24-hour test. Think about big purchases for at least a day. Stepping away from the emotion of the moment gives you a chance to think clearly and more rationally about things.
Protect your credit rating
Understanding your credit report and credit score is like learning a foreign language. Now that you're fluent, you'll be more motivated to take steps to protect your rating.
Try to make it a habit to check up on your credit. Remember to take advantage of your free annual credit reports, and if you find any errors, correct them right away.
Look carefully at your monthly credit card statements to make sure your payments have been recorded, and that there are no fraudulent charges.
Opting out of credit card promotions is something else to consider. It's a lot easier to say no to credit if you're not being bombarded with solicitations in the mail every day. Request to be removed from mailing lists by calling 888.5OPTOUT, (888) 567-8688.
When it comes to getting better at managing money, information is your best asset. BECU's Financial Educators offer seminars to help you learn more about building credit, budgeting, and paying down debt.
FICO is a registered trademark of Fair Isaac Corporation in the United States and other countries.
This is for informational purposes only and is not intended to provide legal or tax advice regarding your situation. For legal or tax advice, please consult your attorney and/or accountant. Investments are not federally insured, not subject to credit union or affiliate guarantee, and may lose value.