What to Look for in Your Credit Report

This article explains what to look for when you order a copy of your credit report and how to understand it.

One of the ways that the Internet is helping consumers is by making it easy to order a copy of your credit report. This can be useful information when you are getting ready to apply for a mortgage loan, or just to give you a general idea about where you stand from a credit perspective.

What You Will See

The major credit repositories collect three types of information. What you see will include whatever applies to you in all three areas:

Public Record Data

This is usually stuff that's not good. The term "public record" means information recorded by government authorities, including courts. So, if you have declared bankruptcy, or have a tax lien on property that you own, or there is some other financial matter in which a court or government agency has recorded an action against you, this will show up in the search of public records. Bankruptcy filings stay on your report for 10 years. Other tax, court and payment delinquencies stay on for seven years.

If you have adverse public record information, this does not preclude you from getting a loan, but it does make it difficult to be rated as an "A" borrower (a term often used to describe people whose credit is viewed as low risk by lenders). Once the issue has been resolved, and after a few years of good credit history, you often can restore a low-risk credit rating. Meanwhile, you probably will have to write a letter to any potential lender to explain the situation (lenders call these "cry letters").

Trade lines

A trade line is a status report on an existing account where you have credit, such as a store charge card or major credit card. The lenders with whom you have these accounts voluntarily supply the status information to the major repositories of credit information.

A trade line covers an account that you now have that gives you either installment credit (a fixed loan that you pay off in regular installments) or revolving credit (a loan whose amount can vary depending on purchases, such as a major credit card or department store credit card). The credit report will show whether you are current or behind payments on the account, and it will show how often you have fallen behind within the recent past (usually one year to three years).

If the trade line section shows only one or two missed payments, and no current delinquencies, you are fine. If it shows you as being currently delinquent, you should remedy the situation before you apply for new credit, such as a mortgage loan.

Inquiries

This shows recent inquiries made to the credit reporting company by companies from which you have requested a credit card or some other form of credit.

What You Won't See

What you will not see is your overall credit rating. There are companies that are separate from the credit repositories but that work closely with them to produce overall credit ratings for individuals, called credit scores. Credit scores are used increasingly by mortgage lenders to make decisions.

Fair Isaac Corporation is the main credit scoring company. For a long time, it resisted allowing consumers to see their own scores. Under pressure from consumer advocates and others, however, the company appears willing to change, and has recently posted on its Web site the criteria it uses to evaluate consumers' credit. Meanwhile, here are some guidelines about credit scores:

1. Public record data less than 5 years old can have a severe impact on your credit score
2. Credit accounts that currently are delinquent can have a major adverse impact on your credit score
3. A track record of "serious delinquencies" (90 days or more) can have a major adverse impact on your credit score
4. A high "utilization rate" (your current credit balances use up most of your available credit) can have an adverse impact on your credit score
5. A large number of recent inquiries (indicating that perhaps you are aggressively seeking credit) can have a modest adverse impact on your credit score.

What to do with your Credit Report

Review the report for accuracy. Be particularly careful to check your personal identification information. If the report uses a misspelled name, address, or Social Security number, this is important to get straightened out.

See if there are issues in the report that could create problems in your credit rating.
Try to resolve the issues that you can -- for example, by paying off any accounts that are delinquent, or reducing your utilization rate.

If the report has inaccuracies, you may wish to contact all three major credit repositories to clear up the issues as quickly as possible. Here are their web sites:

Equifax - http://www.equifax.com
Experian - http://www.experian.com
Trans Union - http://www.transunion.com

What not to do

Do not pay a credit doctor to "fix" your credit report--those services are scams. But do examine your report carefully for errors, because correcting errors can prevent major problems.

Be careful about signing up for a service to "monitor" your credit report. These services are fairly expensive, and often they use a free copy of your credit report as a loss leader. I would never pay the $50 a year or more that these services charge.

Try to avoid overpaying for a credit report. The standard prices I have seen are about $10 or less for a report from one credit repository, and about $30 for a report from all three. If you have no reason to suspect that there are errors in your credit report, it would be better to buy the $10 report that comes from one repository. If that report turns out to require corrections, then you can go back and order a three-repository report.