Credit reports reflect our financial identities. A credit report breaks down how financially responsible you are. Think of your credit report like a fingerprint. They are specially linked to each of us. Your report grows and changes with you throughout the years, based on the financial decisions you make. The more you know about your credit, the more capable you are of knowing how to manage your credit. This is why it is important that everyone has an understanding of what makes up a credit report and that they know how to analyze their own.
Personal identifying information directly links everyone to their own credit report. The first section of a credit report will list your name, any previous or alternate names (maiden, nicknames, or surnames), social security number, date of birth, addresses, and possible employer information. This section is important to review to ensure there isn’t any incorrect information. Incorrect personal information could be a red flag and a sign of possible fraudulent activity. It is vital that any incorrect information listed anywhere on your report be disputed when discovered. Catching and reporting inaccurate information sooner rather than later will save you from a lot of financial frustration down the road. You can dispute incorrect information directly with the credit bureaus or via AnnualCreditReport.com.
Trade lines and inquiries
The heart of your credit report is your financial history. Trade lines list every credit account that you have handled within a seven to ten year timeframe. This includes closed, delinquent, or charged off accounts. Trade lines will also identify the lender from which you borrowed credit, the date that the account was opened and closed, as well as the beginning balance and current balance from the last time the account was reported to a credit bureau. Each trade line will display your credit history with that specific lender and how well you have paid back your responsibility. Your previous credit performances help to determine credit worthiness when you are applying for new credit.
When you apply for any type of credit account, there will be an inquiry placed on your report. An inquiry is a stamp on the report left by the lender who requested to view it. There are soft and hard inquiries. An example of a soft inquiry is when a consumer requests their own credit report. Soft inquiries can also be used by lenders as well, but this typically only provides them a snapshot and a credit score instead of a full, detailed report.
Hard inquiries provide a full credit report and are used when a lender is completing a credit application at the request of the consumer. Hard inquires can affect your credit score, so try to avoid having your credit pulled too many times within a year. Only apply for credit when necessary, and do your research on each lender you are considering before allowing a hard inquiry to be placed on your report.
There are several categories ranging from less to extremely influential that factor into a credit score. We now know that payment history is a huge determining factor when applying for new credit. This is why it is the largest portion of the report that factors into your score at 41% for VantageScore models.
The depth of your credit, along with credit utilization are also factors, both factoring for 20% of what makes up your credit score. Depth of credit is referring to the age of your credit accounts and give a long-term overview of how you handle debt. This also includes the diversity shown on your credit report between revolving and installment loans. Credit utilization focuses slightly on installment loans, but mostly looks at revolving credit in relation to how much credit you use and how much you have access to.
Finally, there are recent credit, balances, and available credit factored in. Recent credit, weighing in at 11%, looks at hard inquiries to your report and new items opened. Balances focuses on the total balances owed on both delinquent and current obligations and accounts for 6% of your total score. Available credit is the final category affecting 2% of your score which reviews how much is available on your revolving accounts.
Know your report
It is essential that you understand how a credit report generates. Know what your credit report says about you. As a consumer you are entitled to review your report for free every year at AnnualCreditReport.com. Being in the know helps you to shape and reshape your financial identity when necessary. Knowing how to read a credit report will also help you to know where improvements need to be made. Staying aware of your financial identity will also assist when applying for new credit. This allows you to have confident and healthy conversations with your lender about all the items on your report, whether positive or negative. Stay connected to your financial identity by learning how to break your credit down. Feel confident in knowing where you stand.