Your credit report is a file which contains information about your financial history, good and bad. It contains your credit card accounts and loans of all types including payment history. In contains your personal information such as name, address, Social Security Number (SSN) and phone numbers. It contains your tax liens, judgments, foreclosures and bankruptcies if you have any.
Credit reports are commonly confused with credit scores. While a credit report contains all sorts of financial information, it doesn’t contain a credit score. A credit score is a three digit number between 300-850, with 850 being the best. This is the range for the FICO scoring model, the standard most commonly used by lenders. There are several other credit scoring models out there though, so pay close attention to the model your score comes from. In a later post I’ll discuss what your credit score is comprised of and why it’s so important.
There are three credit bureaus that collect your financial information. Equifax, Experian and Transunion each maintains their own database, so it’s possible that your reports will differ among the three. I want to walk you through the steps to show you how the three bureaus get your information.
Say you apply for a credit card. As part of the application you give the credit card company your personal information including your SSN. Assuming you’re approved you start to use this card and build up a balance. When the balance comes due, or after 60 days, the credit card company reports your account to each of the credit bureaus. They report your credit limit, your current balance and your payment history. All of this becomes part of your credit reports for a period of 7 years.
If at any time you stop paying your credit card bill, the credit card company may eventually sell your account to a collector, who will then attempt to get the money out of you. Accounts in collection will be reflected on your credit reports. Also appearing on your reports: Chapter 7 and Chapter 13 bankruptcies, liens against your home or car and judgments against you.
Why do the three credit bureaus collect this information about you? Simply put, they stand to make a lot of money selling this information to creditors when you apply for credit.
How can you get a copy of your credit report? The Fair Credit Reporting Act allows you to obtain a free copy of your report once each year from the three bureaus. Go to Annualcreditreport.com. Select your state and enter in your information. This information is used only to verify your identity and allow you access to your reports. You may also be asked a few questions towards the end of the process, to which only you should know the answer. Then choose which bureau you want your free report from.
Tip: Getting your report from one bureau every 4 months keeps you most up to date with your financial history. Use this strategy to monitor for identity theft.
When you have your report, inspect it thoroughly to make sure everything is correct. If you find an account that you’ve never heard of or a judgment that isn’t yours, submit a dispute to the credit bureau and contact the company that put this information on your report. As I mentioned above, anything older than 7 years falls off your reports [the exceptions being Chapter 7 bankruptcy (10 years) and unpaid tax liens (15 years.)]
Knowing what’s on your credit report is an important step in financial literacy. In addition, lenders and others use your credit reports to judge your financial worthiness. Shouldn’t you ensure what they are seeing is correct?