What Is a Credit Report and How Does It Work?
Credit reports track your history as a user of credit over the past seven to 10 years—and they’re the documents used to create your credit score.
People with bad credit often find themselves in a pickle when they need to borrow money—and doubly so when they need to borrow money fast. Their lousy FICO score leaves them stuck with bad credit loans that come with much higher interest rates. And some of these loans—like short-term no credit check loans, payday loans, and cash advances—could even trap them in a dangerous cycle of debt.
While relying on safer and more affordable bad credit installment loans can be a viable short-term solution to this problem, the long-term solution to this dilemma is clear: They need to fix their credit. But in order to do that, it doesn’t really help to look at your score. Instead, you need to examine your credit report; that’s where all the real information is kept.
If you’re unfamiliar with credit reports and how they work, no worries. This article will provide you a brief primer on credit reports so that you can go out there and start improving your credit score today!
Credit reports track your credit history.
The relationship between credit reports and credit scores is often expressed through the following comparison: A credit report is like a quiz you take in school, while your credit score is like the grade you receive on that quiz. And indeed, your credit score only summarizes the information that’s contained in your report.
Credit reports are documents that record your history as a credit user and borrower over the past seven to 10 years. They are compiled by the three major credit bureaus—Experian, TransUnion, and Equifax—from data sent to them by banks, credit card companies, debt collection agencies, and other businesses nationwide. They also contain certain information that is available on the public record.
Information included on credit reports includes identifying info like your name, address, and social security number; credit info like open and closed accounts, loan amounts or balances, payment history, and new credit inquiries; info from debt collection agencies as to what unpaid debts you have open; and info from the public record like bankruptcies and civil lawsuits. While most information stays on your report for seven years, some info, like bankruptcies, stays on your report for 10 years.
All this information is then used to create your credit score. When it comes to your FICO score, the most important categories of information are as follows: payment history (35 percent of your overall score), amounts owed (30 percent), length of credit history (15 percent), credit mix (10 percent), and new credit inquiries (10 percent).
You have multiple reports and multiple scores.
We tend to talk about your credit report, singular, but we really should say your credit reports, plural. Since these reports are compiled by three different credit bureaus, you actually have three different credit reports out there.
If you’ve ever used a free credit score reporting service like Credit Karma or have a “check your credit score” feature in your online banking portal, then you’ll notice that the service always tells you which credit report was used to create your credit score.
This matters because there can be actual differences between the three different reports. Not all lenders and businesses report to all three credit reporting agencies, meaning that certain information—good or bad—could be on one report and not the other two.
This matters for your credit score—or credit scores—as those differences can mean a higher or lower score depending on which bureau’s report is being used to create your score. While the differences between your credit reports are often minimal, an error on one report could end up causing you some major headaches.
Yes, your credit reports might contain errors.
Yeah, about that … not only might your credit report contain incorrect information, but the odds that it does are much higher than you’d think. According to a 2017 report from CNBC, more than one in five credit reports have “potentially material errors” that make those consumers look like a riskier best than they actually are.
If there is an error on your credit report, you will need to contact the credit bureau directly in order to have it resolved. Once they receive your dispute letter, they have 30 days to conduct an investigation, and they must inform you of the results in writing. For more information, check out our blog post on how to contest errors on your credit report.
Good news: Your credit report is free.
There might not be such a thing as a free lunch, but there truly is such a thing as a free credit report. In fact, the three major credit bureaus are required by federal law to provide you with one free credit report annually upon request. If you want to know what’s on your report, just visit AnnualCreditReport.com to order a free copy.
It’s a good thing to get in the habit of checking your credit reports regularly. If someone has stolen your identity and is taking out new personal loans or credit cards under your name, checking your report is going to help you catch them and keep your credit history clear of their wrongdoing. Order a different report every four months, and you can set up your own DIY credit monitoring service without paying a penny!
If you want to fix your credit score and kiss high-interest online loans and risky title loans goodbye, you’ll first need a grasp on why your score is so low in the first place. In order to do that, you’ll need to check your credit report. So what are you waiting for?! To learn more about improving your credit, check out these other posts and articles from OppLoans:
- How to Raise Your Credit Score by 100 Points
- Will Closing a Credit Card Affect Your Credit Score?
- How to Build Credit When You Have No Credit at All
- Have Bad Credit? Here Are Two Things You Should Do