A good credit rating can impact your finances in more ways than one, so it’s vital that you know how to read your consumer credit report. When attempting to qualify for loans, credit cards or lines of credit, lenders take your credit score into account. Your score determines in part whether you’re approved for new credit and what interest rate you'll receive on money that you borrow.
Credit scores don’t just appear out of thin air. They’re calculated using the information in your credit report. The FICO score, originally developed by the Fair Isaac Corporation, is the most popular and is used in 90% of lending decisions. This score ranges from 300 to 850, with 850 considered to be the “perfect” score.
The VantageScore is another credit-scoring model that’s gaining ground on FICO. More than 8.6 billion of these scores – which now feature the same numeric range as the FICO score – were used by more than 2,700 lenders from July 2016 to June 2017. Financial institutions represented the largest category of users by far, almost 74% of all VantageScore credit scores. Ten of the 10 largest banks and 29 of the 100 largest credit unions used VantageScore credit scores in one or more lines of business. In 2017 the average FICO score was 695, while the average VantageScore was 675.
While the FICO and VantageScore models use different algorithms to generate credit scores, they both rely on credit reporting agencies for information. Understanding how to read your credit report is the first step to better credit health.
How to Read Your Consumer Credit Report
At first glance a credit report can seem like a jumble of numbers, but once you know what you’re looking at it becomes easier to decipher. Generally, credit reports are broken down into five main sections.
- Personal Information – Your credit history is linked to your Social Security number. This, along with your name, date of birth and current address will be listed on your credit report. Previous addresses, your employment history and any other names you’ve gone by in the past, such as a maiden name, would also be included.
- Credit Accounts – This is likely to be the largest section of your credit report, depending on how long you’ve been using credit. Here you’ll find details for all your current and past credit accounts, including the type of account, the creditor’s name, the current balance, your total credit limit, your payment history and the date the account was opened and closed.
- Collection Items – When a debt goes unpaid, your creditor can turn it over to a collection agency. Once an account goes to collections, it can show up on your credit report. Collection items can be very damaging to your score.
- Public Records – If a debt collector sues you for an unpaid debt and wins, the court will enter a judgment against you. Judgments can appear on your credit report, as can any related actions to collect what’s owed, such as a wage garnishment or lien against your property. Foreclosures and bankruptcies would also be included in the public records section.
- Inquiries – When you apply for new credit, the lender may check your credit report and score. This is called a hard inquiry. Each new inquiry for credit will land on your credit report. The exception to the rule is inquiries that don’t involve a check of your credit report, including any time you check your own report or score.
Your Credit Report and Credit Scoring
Knowing how to read the information in your credit report is important for several reasons. First, it can give you a better understanding of what affects your score, positively or negatively. FICO scores, for example, are based on five specific factors:
- Payment History
- Credit Utilization or Amounts Owed
- Length of Credit History
- Credit Mix
- New Credit
Each factor carries a different weight in terms of how your scores are calculated. Out of the five, payment history is the most important. On-time payments can strengthen your score, while late or missed payments can cause it to drop substantially.
The VantageScore model uses a similar set of factors, including:
- Payment History
- Age and Type of Credit
- Percentage of Credit Limit Used
- Total Balances/Debt
- Recent Credit Behavior and Inquiries
- Available Credit
Once you know what’s in your report, it can be easier to recognize behaviors or trends that could be helping or hurting your score. From there you can adopt credit habits that could help you build better credit. If you notice that you owe high balances on several of your credit cards, for example, paying down some of your debt may add points to your score.
Reviewing your credit report regularly is also important for detecting errors or spotting potential signs of identity theft. New accounts opened that you don’t recognize could signal that someone is using your personal information to obtain credit. And if you see that your payments aren’t being reported properly, you have the right to dispute those errors under the Fair Credit Reporting Act.
To initiate a dispute, contact online or by mail the credit bureau that’s reporting the information. You’ll need to give it your name, account number and the nature of the information you’re disputing. The credit bureau is required to investigate, usually within 30 days. If your dispute is valid, the error must be removed or corrected. If not, the credit bureau must let you know in writing why the information won’t be changed.
The Bottom Line
Credit reports can seem complicated, but they can be a valuable tool for improving your credit rating. Remember, however, that negative items – including past-due payments and collections – can stay on your credit report for up to seven years; bankruptcies can remain on for up to 10 years. Checking your report regularly can help you build a stronger credit history, which can work in your favor down the line as you seek out new loans or lines of credit.