Tips on Understanding Your Credit Report
What is a Credit Report?
A credit report is a record of your financial behaviour. It contains identifying information about you and indicates how responsibly you have used credit and met your financial obligations. Credit reports are prepared by credit reporting agencies, or credit bureaus, based on information voluntarily supplied by financial institutions, mortgage companies, credit card issuers, and other lenders. Credit bureaus also gather information from local courthouses and public records concerning tax liens, foreclosures, bankruptcies and other credit-related matters.
Establishing and maintaining a good credit record is very important. Your credit report is purchased by lenders, employers, insurers, public utilities and others who, as determined by the Consumer Reporting Act, have a legitimate need for the information.
A low credit score could deny you access to a credit card, mortgage or car loan, insurance, electric and telephone service, an apartment rental unit or a job. And, it could result in your paying thousands of dollars a year in additional finance charges.
What's more, a poor credit record can follow you for several years. Late payments, defaults and other derogatory information can generally remain on your credit report for up to seven years; a bankruptcy can remain on your report for 6-14 years, depending on a first, second or third filing.
Those with excellent credit files receive the best interest rates and payment terms from lenders. If you practice good credit behaviour, you should have no problem securing credit when the need arises.
What does a Credit Report look like?
It's important to understand what is in a credit report. First is a personal profile section, which includes your name, other names you were formerly known by, Social Insurance number, date of birth, current and former addresses, telephone number and the name of your employer(s).
Another section offers information that is a matter of public record. Previous defaults, foreclosures, garnishments, bankruptcies, or other legal judgments against you will appear in this section.
A third component is credit history information, which includes a listing of your specific mortgage, installment credit and revolving credit accounts; the date the account was open, the credit limit or loan amount, balance and monthly payment; and whether your payments have been on time, and if not, how many days late. The report typically includes closed accounts, as well as accounts that are currently open.
Finally, there will be an "Inquiries" section that lists any creditors, insurance companies and lenders who have asked for your credit report. Under the Consumer Reporting Act, credit grantors with a permissible purpose and prior consent may inquire about your credit information without your prior consent.
There is some information that does not generally appear on a credit report. Credit reports typically do not include information about race, gender, religion or national origin; personal lifestyle or political preference; driving records or any other information unrelated to credit. By law, a credit bureau cannot disclose certain medical information. In addition, your credit report will not contain information about your checking and savings accounts or brokerage accounts.
Credit Reports are used to calculate your Credit Score
Information in your credit report or credit file is used to formulate your credit score. This number, which can range between 300 and 850, depending on the credit reporting agency, summarizes your creditworthiness. It helps potential lenders, landlords, employers to quickly gauge your credit history and predict how likely you are to make your credit payments on time. They look at your credit score to decide what kind of risk they assume if they approve your application. The higher the score the lower the risk.
Each credit reporting agency uses a different scoring model so your credit score may vary from agency to agency. Nonetheless, the scoring models are mostly influenced by the following: how you pay your debts and how much debt you owe. When formulating your score, each agency pays close attention to:
- Your payment history. Do you pay your credit accounts on time? Are there bankruptcies or other negative items on your record?
- How much you owe. What is the total owed on all of your account? What percent of your available credit are you using? Is your debt load manageable?
- The length of your credit history. For how many years have you demonstrated responsible credit management?
- Have you recently applied for or opened new credit accounts?
Most people have a credit score in the 600s and 700s. Scores above 700 are a sign of financial health and can earn you relatively low "prime" interest rates and favourable lending terms. People with scores about 760 are charged the lowest rates.
If your credit score is below 600, lenders will view you as high risk. They could turn down your credit application. You may have to use a "sub prime" lender who will offer you less favourable payment terms. You will be charged much higher interest rates and will probably have to make a larger down payment.
If you are married, be aware that you and your spouse do not share a credit score. In fact, each spouse has a separate score that reflects his or her own past credit history.
How can I obtain a copy of my Credit Report or Credit Score?
It is recommended that you review your credit report regularly to stay on top of changes to your credit profile, to confirm the accuracy and completeness of information that is being reported, and to be certain that no one has stolen your identity and opened credit accounts or taken out loans in your name. It is particularly important to review your credit report if you plan to make a major purchase so that you can correct any errors that may prevent you from getting the best possible loan terms.
Be aware that there is not just one credit report on you. Most likely, each of the two major consumer credit bureaus (Equifax, and TransUnion) has a report on you. You are entitled to a copy of your credit report from each of these two bureaus. However, you must request it; this is not a service that is provided to you automatically. Online credit reports are available as well as written reports.
What if my Credit Report contains inaccurate information?
Once you have a copy of your credit report, review it carefully. Your credit report is the basis for your credit score, so you want it to be as accurate and complete as possible. Review the information to check that it accurately reflects how you have paid your bills; verify that all accounts listed are indeed yours; look for signs of identity theft, like new accounts that were opened in your name, without your knowledge or permission; and identify accounts that you no longer use and do not need and make a note to close them.
If you do find an error in your credit report, you have the legal right to dispute it. You should immediately contact the credit reporting agency, in writing, to advise them of inaccurate or incomplete information that appears in your credit report. Refer to your credit report for specific instructions on how to dispute information that is in your file. Remember to keep copies of your dispute letter and enclosures (receipts, sales slips, billing statements and the like), and to send your letter by certified mail "return receipt requested."
The credit bureau is required by law to investigate your complaint, usually within a legitimate time frame, to send you a prompt response in writing, to correct or delete any inaccurate information, and to send you a copy of your report if the investigation results in any change.
Because creditors generally automatically update credit bureau information once each month, it is possible that incorrect information removed from a credit bureau file could reappear because of a pending creditor update. Therefore, you should re-check your credit report within 90 days to confirm that it is accurate and up-to-date.
If the credit bureau's investigation does not resolve your concerns, you are entitled to submit a brief statement (100 words or less) about the matter, which the credit bureau must attach to your credit report. This enables you to provide your side of the story to lenders, potential employers or anyone else who sees your credit report.
If you are denied a loan, insurance, employment or other benefit based on your credit report, the law requires the company to tell you the name of the credit bureau. You are advised to then determine if any credit report information is wrong. If it is, begin the process of correcting it immediately.
You can impact your Credit Score
Your credit score is not static. This is good news! The score changes when your information changes at that credit reporting agency. You can improve a poor score over time by improving how you handle credit.
- Pay all of your bills on time.
- Contact your creditor immediately if you are unable to pay your bills on time to work out a manageable payment plan. Then stick to it!
- Maintain a small number of credit cards and close unused accounts.
- Keep your debts reasonable and your credit balances low.
- Apply for and open new accounts only when you need them. If you haven't been able to qualify for a bank credit card, apply for a department store card or gasoline credit card.
Beware of "Easy Fixes!"
Each of the steps detailed above will help you to improve your credit profile on your own, over time, for little or no expense. Unfortunately, too many consumers want an "easy fix." Beware of credit repair companies that "guarantee" they can remove late payments, bankruptcies and other negative information from your credit report. Another red flag is the suggestion to create a "new" credit report or identity by applying for an Employer Identification Number (EIN). An EIN is used primarily by businesses; obtaining an EIN under false pretenses is a crime!
Bottom line - Don't succumb to shady offers If you want to improve your credit the right way, contact a reputable source for credit-related information, education or counselling. Check with the Consumer Debt Agency in the area where you reside.
If you decide that you need credit report counselling, check the agency's record with IntegrityLink.