Understanding Your Credit Report - A Beginner's Guide

Understanding your credit report is the first step toward improving and protecting yourself against identity theft. These reports contain detailed records of debts owed and payments history with lenders such as banks, credit card companies and mortgage lenders.

Lenders use credit reports to determine whether and at what rate they will loan money to individuals. Employers and insurance providers also review them when making employment and policy rate determination decisions or rental approval decisions.

What’s a Credit Report?

Tens of thousands of creditors (such as retailers, credit card issuers and banks) send updates on the usage and payments to three nationwide credit bureaus for compilation into credit reports - in-depth accounts of your financial history as well as helping calculate a simplified numerical representation known as your "credit score."

Credit report information includes your name, birthdate and Social Security number as well as information on your mortgages, car loans, credit cards and student loans; balances in account balances; as well as public records such as civil suits or bankruptcies that could affect you.

Your credit file contains an overview of both hard and soft inquiries made against it recently, which may have an impact on your score. These can include credit application inquiries from potential lenders as well as prescreened offers you have accepted to receive. In addition, any debt collection agencies involved with your accounts are listed.

What’s a Credit Score?

Credit scores are used by lenders to evaluate your risk when making lending decisions and to establish the terms of any loans or credit cards you may qualify for. It's based on your credit report, although different lenders can have different scoring models that put more or less weight on different items in it.

Equifax, Experian and TransUnion are the three primary credit scoring agencies. Your scores may differ between bureaus as not all creditors report to all three bureaus.

Credit scores are determined using information found in your credit reports, including how much and for how long you owe, account types you maintain and whether or not any recent applications for credit caused hard inquiries on your report (although inquiries from businesses for promotional purposes do not count towards your score).

What’s a FICO Score?

FICO scores are numbers generated from your credit report that lenders use to assess how likely it is that you will repay their loans if given them. Lenders use this score to decide how much money to lend you, when and for how long, as well as any possible fees or interest rate charges (interest rate). While numerous scoring models exist that lenders may use, FICO scores remain among the most frequently utilized models.

Fair Isaac Corporation (FICO), commonly referred to as FICO, introduced the FICO score in 1989 in order to standardize how lenders assessed creditworthiness and replace various scores previously used (some which took into account political affiliation and gender). Over 90% of top lenders buy FICO scores; therefore if you apply for a loan it's likely one will use one of three major credit bureaus such as Experian, Equifax or TransUnion when gathering your FICO score.

How can I check my credit report?

Information contained in your credit report can have a huge effect on whether businesses offer you loans, hire you as employees or rent an apartment to you. Therefore, it's vitally important that you check and correct any discrepancies on a regular basis - once every 12 months from each of Equifax, Experian and TransUnion for free reports.

Your credit report contains personal and financial information such as your name, address and Social Security number; credit accounts (such as account balances and types as well as late or collection status); your credit history; as well as a calculation of risk based on information contained within it - where higher scores indicate greater likelihood to pay back loans and bills on time - businesses often use credit reports when deciding if and under what terms to lend money.

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