Your credit score will define your financial life, so you should learn as soon as possible how to read your credit report. Take a look at this guide and become an expert!
Three-digit scores can change your financial life. That's how important your credit score is. The approval for loans, lines of credit, or rentals will mainly depend on your score.
So, it isn't a bad idea to learn how to read a credit report! This skill will help you keep track of your score and prevent unwise decisions.
Take a look at this guide and learn how to decode your report.
The structure of a credit report
Credit reports are usually divided into six sections: Personal information, employment history, consumer statements, account information, public records, and inquiries.
Here's the detail of what you can find in every section.
1. Personal information: You will basically find your name, social security number, date of birth, current and previous address, and your phone number.
2. Employment history: This section will show lenders and creditors where you've worked and where you are working now.
3. Consumer statements: Here you can add information that may be useful to lenders or creditors, like detailing the reasons why you fell behind with a bill. Although this data won't affect your score, it will give lenders a broader perspective on your past credit issues.
4. Account information: This section will include details for your accounts. For example, the amount of opened/closed accounts, payment history, current balance, and amounts owed. This is key information for your credit score.
5. Public records: Here you will find detailed information regarding foreclosures, bankruptcies, or civil judgments, which can affect your score.
6. Inquiries: This section will show how often a hard pull of your credit is performed. This can happen when you apply for a loan or a line of credit.
What to look for in a credit report
If you know what you are looking for, it will be easier to read a credit report. So, what you should always check is if your personal and employment information, if all your credit accounts were reported, and if the information is accurate.
Errors on credit reports are more common than what you think! And they are also bad news because they can damage your credit score, so it's vital that you check your reports thoroughly.
In case you find a mistake or inaccuracy in your report, make sure you reach out to the credit bureau to fix it.
The bureau will then have 30 days to investigate your claim and amend the error if it exists.
5 companies that can check your credit report even if you did not apply for a loan
We tend to think that the only ones that are going to check our credit report are lenders who we want to borrow money from. But that’s not true!
It makes sense for lenders to check your credit report. After all, they are giving you money so the least you’d expect is for them to check what kind of financial behavior the borrower has. But the federal law allows other types of companies to peek at your credit history, here are 5 of them:
1- Insurance companies
Credit reporting companies can release your information to insurance companies because they use this information to set your premium charges. Federal law allows insurance companies to prescreen your report in order to offer you different quotes, but it also allows you to opt-out of prescreening.
A potential employer can request a copy of your credit report as part of a background check. However, the employer must have written authorization before pulling your credit report. Of course, you can refuse but that might cause the employer to reject your application.
3- Public utilities
When you sign up for water, electricity, or gas, you might be required to submit your credit report. Why? Well, because of the way those services work. Public utilities are paid in arrears —which means that you pay for usage, so naturally, first, you use the service and then you pay for it. If you put it this way, it makes sense for companies to make sure you can actually pay bills.
Federal law also allows landlords to request a copy of your credit report —and this is actually a very common practice. While rent is not usually reported to credit bureaus, your credit report can give your potential landlord the idea of your overall likelihood to pay and your financial responsibility.
5- Nursing homes and assisted living facilities
If you apply to live in one of these places, you can expect them to request your credit history, as they treat every application like applying for an apartment, so with your credit history, they can also evaluate if you are a good candidate or not.
5 myths about credit scores
Your credit score plays a big role in your financial life and having a bad record can have negative consequences in several aspects of your life. But you’ve probably heard a lot of things about FICO score that are simply not true.
Myths are part of our everyday life, but some of them might have a bigger impact than others. When it comes to your credit score, here are some myths to bust:
1- ‘If you check your credit score, it will drop’
There are two ways of checking your credit score: hard inquires and soft inquiries. A hard inquiry is the one that creditors run before they approve your loan or credit line. Too many of these can lower your score, that’s true. But soft inquiries, which are basically quick looks just for educational purposes, won’t affect your score at all.
2- ‘If you close your credit card, you will improve your score’
Creditors like to see that you can use credit responsibly. So the best you can do is paying your full balance every month and not carrying debt. Closing all of your credit cards will actually hurt your score. If you do need to close accounts, start by closing the newer ones and keep the older ones open because they are more helpful to your credit score.
3- ‘There’s no need to check your score if you already know it’s bad’
Most people tend to say this and it is just not true. A good and healthy habit is checking your score at least once a year. People with bad credit scores tend to skip this step, but it is important to keep track of it. Mainly because credit bureaus make mistakes sometimes, and you might be penalized for someone else’s problems.
If you find any error or incorrect information, you can report it to the credit bureau and have it removed, but if you don’t check your score, you won’t be able to find anything.
4- ‘If you pay your debt, it will disappear from your record’
This is not entirely true. Your debt will disappear…eventually. Credit records are long-term studies of how a person handles credit and debt, so every item remains in your credit history for seven to ten years.
5- ‘Only credit card debt will affect your credit score’
Unfortunately, this isn’t true. In reality, almost any kind of debt affects your score negatively, whether it is credit card debt, loans, unpaid parking tickets, or overdue medical bills. Even paying your rent or utility bills late can have a negative impact on your score.