Your credit reports play an important role in your financial life. Whether you are applying for a loan, auto insurance coverage, or a new apartment, the condition of your credit could either make your life significantly easier or a lot more difficult.
Because your credit matters so much, it's important to keep a close eye on your credit reports from all three major credit bureaus - Equifax, TransUnion, and Experian - and learn how to read a credit report.
You can claim a free copy of all three of your reports once every 12 months from AnnualCreditReport.com. You may also be able to access free copies of your credit reports if you've recently been turned down for financing, and both Credit Karma and Credit Sesame allow you to check your score for free at any time.
By checking your credit often, you'll be better equipped with the knowledge you need to earn and keep a good credit rating. You'll also be in a position to respond quickly if any fraud or mistakes appear on your reports. (Unfortunately, it happens.)
How to read a credit report
Most credit reports are broken down into sections that make your information easier to understand and digest. Different reports might display the following sections in different sequences, but as long as you know what to look for in each, you should be able to understand your report regardless of the order in which the sections appear.
Here's a look at what you might expect to see if you access a standard copy of your own credit report online (aka a consumer disclosure).
1. Personal information
The first part of your credit report is usually the personal information section. It contains details like:
- Name
- Present and former addresses
- Date of birth
- Social Security number
- Present and former employers
The information above won't have an impact on your credit scores, but you still want to make sure it's accurate. A wrong address, for example, might be a minor mistake. But it could also indicate a bigger problem, like identity theft or a mixed credit file.
2. Accounts
The second section of your credit report typically lists your accounts - both open and closed. This is actually one of the most important sections of your credit report. The information contained here can have a big impact on your credit scores in several ways.
In addition to listing your accounts themselves, this section of your report contains details about how you've managed those accounts over time. Those details may include:
- The date an account was opened and (if applicable) closed
- Your payment history each month (on-time, 30 days late, 60 days late, etc.)
- Current balance
- Credit limit
- Original loan amount
- Current status (current, past due, etc.)
Let's say your report shows a credit card that's five years old. You've never paid late and your balance-to-limit ratio (aka credit utilization rate) is low. That account is likely helping your credit scores. On the other hand, if your report shows a card with habitual late payments and a high balance-to-limit ratio, your scores are probably taking a hit as a result.
3. Collections and public records
Hopefully this section of the credit report will be empty. However, if you've had accounts that have been sold or turned over to a collection agency for non-payment, this is the section where they will appear on your report.
A collection account on a credit report should contain the following information:
- The name of the collection agency
- The original creditor's name
- The balance on the account
Currently the only public records included on credit reports are bankruptcies.
If you do have collection accounts or bankruptcies on your reports, they're likely having a negative impact on your credit scores. Thankfully, as negative items grow older, any impact on scores lessens over time. Best of all, after seven to 10 years, federal law requires most negative information to be deleted from your credit reports entirely.
4. Inquiries
The final part of your credit report is the inquiry section. It contains a list of who has accessed your credit report in the last 24 months.
"Soft inquiries" occur when you check your own credit and will only appear on a report you pull yourself. They don't show up on a lender's credit report.
"Hard inquiries," like those that occur when a lender pulls your credit as part of an application, have the potential to damage your credit scores slightly. However, even though these inquiries may remain on your report for 24 months, they're only factored into your credit score for 12 months.
Disputing incorrect information
Unfortunately, errors and fraud wind up on credit reports all the time. This is the primary reason why checking your reports frequently is so important. Remember, if you discover information on a credit report that isn't correct, you have the right to dispute it.
Need help disputing items on your credit report and improving your score? CreditRepair.com can help »
Disclosure: This post is brought to you by the Personal Finance Insider team. We occasionally highlight financial products and services that can help you make smarter decisions with your money. We do not give investment advice or encourage you to adopt a certain investment strategy. What you decide to do with your money is up to you. If you take action based on one of our recommendations, we get a small share of the revenue from our commerce partners. This does not influence whether we feature a financial product or service. We operate independently from our advertising sales team.
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