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What Do They Know About You?

Somewhere, in a computer far, far away, is a file with your Social Security number on it. Included in that file is the amount of money you owe, the number of credit cards in your wallet, the number of times you've missed payments, and your dating history. (Lucky for you, that last one is not true.)

This history of your financial liaisons, known as a credit report, has the power to make you look like a beauty or a beast to potential lenders.

Why should you care? Well, unless you have enough cash to purchase your house or car without the help of financing, a credit report figures prominently in your future. Also, financial services providers -- such as insurance companies -- use credit reports to evaluate whether you're worth their time.

A credit report will list:

  • All the credit cards you currently use, their balances and their limits. It also lists cards you've owned but canceled.

  • Information on your mortgages, car loans and school loans.

  • All public financial records, such as bankruptcies and liens.

  • Times you were late with your payments, i.e., delinquencies.

  • The number of times your credit history has been requested.

Some of this information (the good stuff) stays in the report indefinitely, while "smudges" must be removed after seven or 10 years. A lender uses all that information to calculate your credit score.

Privacy issues aside, credit reports aren't all bad. After all, being able to borrow $150,000 to buy a house gets a roof over your head without a huge cash outlay. However, what makes a "good" credit report is not so obvious.

Let's use the example of Pugnacious, a fellow looking to buy a house. He tried to get preapproved by a mortgage company. However, according to his report, Pug didn't have much of a credit history. He bought his car with cash, paid for everything with his debit card, and canceled his credit card two years ago. The mortgage company wouldn't lend him money since they didn't know what kind of borrower he'd be. They suggested he get some credit cards, maintain small balances, and pay them off regularly.

Three years later, Pug again enters the house-buying fray. This time, the mortgage folks told him he had too many open lines of credit. Also, because he had trouble keeping track of all his payments, he had a few delinquencies on his record. Finally, his report showed a bunch of requests for his credit history.

Those factors combined to lower his credit score and affected his ability to qualify for a loan. Fortunately, Pug's problems were solved by paying off and canceling some cards, and having a reasonable explanation for his delinquencies.

Order a copy of your credit report, Fool. The top three providers are Equifax, Experian, and Trans Union. You can order your credit report from each agency individually -- or order from all three agencies in one easy step at TrueCredit.com.

Close all lines of credit you don't need, and make sure all the information is accurate. (One caveat: If closing most of your credit lines means you will max out your remaining credit card, keep a few open and pay off that debt. Maxing out one or two cards isn't so great for your credit score, either.) Two billion pieces of information are entered into credit records each month, so mistakes are made. If you do wish to challenge an item -- or offer an explanation -- follow the instructions provided in the report.

For more on the crazy world of credit, visit The Motley Fool Credit Center.


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