Credit reports are important financial instruments that affect many areas of your life, so it is a good idea to understand what a credit report is and why it is so important.
After all, how does a credit report actually impact your life? Can it really make a difference between getting a car loan and getting denied for one? What can you do about it if you find a mistake on your credit report?
Since the topic of credit reports is so important, we have divided this subject into three articles. In part one (this article), we will review what a credit report really is and why it is very important. Part two and part three will cover what you can do about problems on your credit report so that you can take proactive action if you find an error on your credit report.
Be sure to check out all three parts of this series to get the complete picture of what you need to know about credit reports and what you can do about your credit score to make it better.
What is a Credit Report?
A credit report is a detailed summary of your credit history as determined by a credit bureau.
A credit bureau is an agency that collects financial information about you to help lenders determine your creditworthiness. This can make or break you, depending on whether you are relying on a loan to reach a financial status or goal.
A credit bureau researches your credit and financial details and sells it to creditors for a specific fee. Each credit bureau is required to give you one free credit report per calendar year. The three major credit bureaus in the United States are Equifax, TransUnion, and Experian.
Your credit report has personal and financial information regarding your lines of credit along with information regarding any bankruptcies you may have had and other financial details. Along with bankruptcies, tax liens, and other judgments, your credit report includes your social security number, any lines of credit you may have, and credit inquiries from financial entities.
Factors that Impact Your Credit Report
There are many factors that impact your credit report and a few that don’t – things you might be concerned about, thinking they do impact your credit report. Your age, payment history, residence, total debt and financial balances, credit utilization, credit mix, and credit length are all factors that impact your credit report.
So, how do these factors affect your credit report? Usually, these credit factors help determine your credit score. Many lenders use credit scores to determine your eligibility for a loan, for example. These factors make a difference in the points that make up your credit score, but it depends on the policy of the lender.
For example, a lender might assign two points if you are between the ages of 18 and 25, and the same lender might assign six points to borrowers who are over the age of 65. That’s one example of how age could affect your credit report.
If you’ve lived at the same residence for a certain period of time, you might be assigned more points. Most lenders agree that this should be at least two years at the same address. This is because this scoring factor shows stability. If you own your home, you are likely to receive a higher score than if you are a renter, however.
Things that won’t affect your credit report include checking your own credit score and making rent and utility bill payments. Also, the amount of your income and the total of your bank accounts do not impact your credit report. These things may be important to lenders if you are trying to obtain a line of credit, but they are not impactful on your credit report, specifically.
Why Does Your Credit Report Matter?
Since your current or potential lenders base your creditworthiness on your credit report, it is an important document! You’ll likely want to put your best foot forward as you aim to improve your credit score with the credit bureaus that report their findings on your financial information.
Your credit report determines your credit score based on your ongoing financial information. This information can make or break your dreams if they are tied to financial commitments because your credit report gives a clear picture of your overall financial health.
In examining your credit report, lenders are able to determine if they are financially able to lend to you or not. This could mean a yes or no to your dream house or dream vehicle, for example. This means that, essentially, your credit report impacts your dreams or your ability to achieve them!
Credit reports are also important as they can help you identify errors. This could mean someone has stolen your identity, fraud has taken place, or something has been reported incorrectly to a credit bureau. It’s a great idea to grab a copy of your credit report once a year so that you can watch out for these things and take action if need be.
Now that you understand credit reports and the importance of these reports, you can watch your credit score to ensure it doesn’t suddenly drop for the wrong reason. One way to do this is to obtain a copy of your credit report from a credit bureau at least once a year. Check the items listed on your credit report to ensure everything is valid and expected.
If there is anything on your credit report that should not be there or is listed incorrectly, you can write to the credit bureau that’s reporting the information. Since each credit bureau reports things a bit differently, it is a smart idea to obtain a copy of your credit report from each of the three credit bureaus to ensure nothing unexpected shows up.
If you are concerned about your financial position, it’s a good idea to talk to a professional. At Borshoff Consulting, we offer tax and business consultations. Be sure to contact Indiana’s tax expert, Sherry Borshoff, to determine how she can best meet your needs. We look forward to helping you with your finances or tax matters! Get a free consultation today!