5 Things You Absolutely Need to Find in Your Credit Reports
Gerri Detweiler
You probably already know it's a good idea to review your credit reports and your credit scores. But what happens when you get a copy of your credit report and you aren't sure what to make of it?
In a recent survey by Credit.com, 27% of consumers who said they had reviewed their credit reports were surprised by some of the information they found. Fifteen percent weren't sure of the relative importance of the individual sections of their reports. And 8% said they didn't know how to read their reports.
If you find credit reports confusing, here are five things to focus on when you read yours.
1. The Negative Items
Credit reports typically group all information that may be considered negative — such as accounts with late payments, collection accounts, judgments, tax liens and bankruptcies — in a section called "adverse accounts" or "potentially negative items." This type of information has a significant impact on your credit scores, so review it carefully. If the items reported here are incomplete or erroneous, you can dispute them. If they are correct, don't despair. As they become older, they should have less impact on your credit scores provided your report lists recent on-time credit references.
Also understand that paying your bills on time is no guarantee that you won't find anything negative in your reports. In fact, in the Credit.com survey, 10% of respondents who had seen their reports said they found a collection account they didn't know about and 9% found a late payment they weren't aware of on their reports. Be sure to get your free annual credit reports so you can make sure there are no surprises on yours.
2. How Your Payments Are Impacting You
Most people will find two types of credit accounts on their reports: revolving accounts and installment accounts. Credit cards are the most common type of revolving accounts on credit reports. With this type of account you can borrow up to your available credit limit whenever you choose. Revolving accounts can have a significant positive impact on your credit scores as long as you do two things: pay on time and keep your balances low.
When looking at your reports, pay special attention to the balances reported on revolving accounts. That's because most credit scoring models will compare the reported balance on each revolving account to the credit limit to calculate the "debt usage" ratio. To build strong credit, try to keep each revolving account balance 25% or less of your available credit; 10% or less is ideal .
As you scrutinize your report, also note that balances listed may be different from what you expected. That's because issuers may report balances before your payments are received. Compare a recent statement to the credit report and you'll likely find that most of your issuers send data to the credit bureaus around the statement closing date. If you normally pay your bills in full but use a significant amount of your credit line, you may want to consider paying the bill sooner — before the issuer reports.
Installment accounts, on the other hand, include student loans, mortgages and auto loans. For these accounts, payment history is the most crucial factor. While the balances owed are figured into credit scores, they typically don't carry the same weight as the balances on revolving accounts. An installment account paid on time can contribute significantly to credit scores.
3. Who's Reviewing Your Credit
The "inquiries" section of your credit report lists the names of companies who have seen your credit reports in the past two years — and why. Inquiries typically have a small impact on credit scores; a single inquiry may cause your credit scores to dip by around 3 to 7 points.
Certain types of inquiries, such as account review, employment, insurance and promotional inquiries, don't impact your credit scores at all though. And reviewing your own credit report or scores doesn't affect your credit scores. Credit reporting agencies usually break these out into a group under a heading such as "inquiries not shared with others" or "inquiries that don't affect your credit."
One reason to review the inquiries section carefully is to see if there are inquiries from companies you don't recognize, particularly under the section that lists inquiries that do affect your credit. If so, investigate to make sure there was a legitimate business purpose for reviewing your credit report. With the exception of inquiries for preapproved credit offers, inquiries from companies you've had no contact with could indicate identity theft.
4. What the Bureaus Know About You
While personal information such as your address or variations of your name doesn't directly influence your credit scores, it's still important. This information may be used to help "match" your information to your report, and wrong information here can be a sign of bigger problems. Pay particular attention to data that is way off — an address you've never lived at, a variation of your name you've never used, or employment information that describes a place where you've never worked. That kind of information may indicate your information is mixed up with someone else's, or even be a tip-off to identity theft.
5. Dates
Dates on credit reports are crucial. They are used to help track how long information can be reported (most negative information is limited to seven years, 10 in the case of bankruptcy). And they can affect your credit scores in a number of ways, since recent information tends to carry more weight, while older accounts help establish an older "credit age" which is valuable.
So review dates carefully, and if there are any you don't understand, you can contact the credit reporting agency or creditor for clarification, or dispute them if you believe they are wrong.
If you need more help understanding your credit reports, this credit report cheat sheet can help you interpret your credit report. In addition, you can get a free credit report summary from Credit.com that will give you two free credit scores along with information about what's impacting your credit.
