Diligence has its perks.
© Alekss/stock.adobe.com, © Sonate/stock.adobe.com, © Andrey Kuzmin/stock.adobe.com; Photo illustration EncyclopÊdia Britannica, Inc
Just about anytime you make a sizable financial transaction or agreementâapply for a loan, rent an apartment, or even land a jobâsomeone wants to look at your credit report. But what is a credit report, and what can it be used for? And how does your credit report differ from your credit score?
Key Points
- The information on your credit report is used to determine your credit score.
- The information in your credit report can affect whether you are approved for loans, credit cards, and other financial matters.
- You can view your credit report each year free of charge.
Hereâs a look at one of the most important elements of your financial identity and what you can do to take charge of it.
Your credit report is a collection of information about your loans, credit cards, and other payments (such as utilities) and how you handle them. For example, information about a loan or credit card shown on your credit report might include:
- The date you received the loan or credit card
- Your outstanding balance
- The credit limit
- The date of your last payment
- Whether the payment was late
A credit report also records whether youâve applied for new loans or credit cards, even if you werenât approved. (In fact, loan or application denials can negatively affect your credit.)
There are three main credit reporting agencies (âcredit bureausâ): Experian, Equifax, and TransUnion. Lenders and creditors report information to these agencies, who then use it to tell the story of your credit history.
When you apply for a mortgage or other loan, rent an apartment, or apply for an additional credit card, your credit report offers an idea of how likely you are to make on-time payments and ultimately repay your loans.
Who reports information to the credit bureaus?
For the most part, the information in your credit report comes from lenders. When you apply for a loan, they report that information, and then regularly report your payments and your balances. When an account goes to a collections company, that company can then start reporting to the credit bureaus.
Lenders arenât the only ones who might report information to credit bureaus. For example, if you miss a rent payment, your landlord can report that. If you donât properly cancel your gym membership but instead just stop making payments, those missed payments can go on your credit report. Even some libraries and city traffic ticket departments report fines to credit bureaus.
Who looks at your credit report?
A variety of financial service providers and others might want to look at your credit report to get a feel for how youâre likely to act in different situations:
Hard vs. soft: What to know about credit checks
A lender will usually perform a hard credit check, also called a hard credit inquiry or âpull,â after youâve submitted an official loan application. A lender will do a soft credit check for a loan pre-approval, or to show you what you might qualify for and the rate you could reasonably expect to get.
Learn more about soft vs. hard credit checks and how each may affect your credit score.
- Lenders. Before sending money your wayâfor a home mortgage, auto loan, or credit cardâa lender wants to know whether you present a risk of nonpayment. If youâve missed a lot of other payments or have accounts in collections, that can be a red flag that you might not fulfill your obligation. As a result, they might decide not to loan you money, or they might charge you a higher interest rate to compensate for their increased risk.
- Landlords. Some landlords might want to get an idea of how likely you are to pay your rent on time. If your credit report shows a lot of late payments, a landlord might require a bigger security deposit or deny your application.
- Employers. Although employers canât access your credit score, they can get a special version of your credit report. If there are red flags that indicate you might present a risk of theft, embezzlement, or bribery, you might be turned down for a job.
- Insurance companies. An insurer might use credit data to set rates for an auto or homeowner policy.
How does your credit report affect your credit score?
The information from your credit report is used to determine your credit score. Credit scoring companies assign values to the information in your credit report and then use a complex equation to compute your credit score. Some of those values include:
- Whether you pay your bills on time
- If you have missed payments
- How much of your available credit youâre using
- How old your credit and loan accounts are
- Whether youâve applied for new credit recently
All this information is valued and weighted, then run through a mathematical model to come up with your score. There are different credit scores, depending on the model used and which bureau a financial service provider gets their information from. But youâll typically see credit scores range from 300 (the low end of âbadâ) to 850 (the high end of âexcellentâ).
Your credit history creates a âstoryâ of you.
EncyclopĂŠdia Britannica, Inc.
How can I build a good credit history?
Building a good credit history can help you improve your credit report and score. Here are a few of the top ways:
- Make payments on time. In general, a credit score weights your payment history most heavily. When you make your payments on time, you build a positive credit history.
- Keep your debt levels low. The next most important item is how much of your available credit balance youâre using. Because a credit report includes your credit card balances, the more you use, the lower your score.
- Donât close older credit cards. Your credit report includes information on how long youâve had loans, so your credit score usually takes into account how long youâve been using credit. Keep older credit cards openâmaking at least one purchase on them every once in a whileâand then pay off the balance quickly.
- Have different types of loans. A mix of types of credit is included in your credit score. If your credit report shows an installment loan, such as a car loan, along with a credit card, it can help your credit score.
- Limit how much credit you apply for all at once. Your credit report includes information on loans youâre trying to get. When you apply for a lot of credit and have newer loans, that can lead to a lower score. If you can, spread out your credit applications and establish a credit history with each one before applying for another one.
The bottom line
Your credit report is a valuable tool that gives you insight into how lenders and other financial service providers view you.
Did you know that you can see your own credit report once each year for free by visiting AnnualCreditReport.com? This programâmandated by federal lawâoffers information from all three credit agencies.
Check your credit report at least annually to ensure itâs accurate, as errors can drag down your credit score. Remember: The info in your credit reportâthe good and the badâwill affect your ability to reach your financial goals.
This article was most recently revised and updated by Miranda MarquitThis article was most recently revised and updated by Nancy Ashburn
