Decipher Your Credit Report
The permanent record of your credit history comes in a concise package: your credit report. You can get a free copy from the annualcreditreport.com website. Once you have your report handy, it's helpful to understand the information that credit reporting bureaus have on you and your credit history.
Credit report structure
Each section of your credit report talks about a different aspect of your credit. Various credit reports are formatted differently, so you may not find everything in the same order we present here; still, you should find most of the same information.
Part 1: Personal information
This section has identifying and employment information, which can include your name, your spouse's name, current and former addresses, date of birth, current and former employers, and any aliases you go by. (What, you're not a rebel?) This part of the report is sometimes called the "Credit Header," and it contains only information considered public, not private.
Make sure that all of the information is complete and accurate. Pay attention to suffixes in your name, especially if you're male. Fathers and sons with the same name will sometimes get information reported on each other's reports. Look at the previous addresses section to make sure they are indeed places you've inhabited. Check your marital status and employment history to make sure it passes muster with your memory.
One of the ways to ensure accurate credit header information is to be sure that you fill out personal information completely and correctly whenever you share that kind of data with a potential creditor. For the most part, you want to be positively identified when applying for a loan, especially larger loans like a mortgage or car loan.
Totally inaccurate information on your report is even worse than incomplete information. Be especially leery of information you don't recognize, such as addresses where you never lived, an incorrect middle name or initial, etc. The last thing you want is for a lender to mistake you for someone else -- especially someone with a worse credit history.
Part 2: Summary information
You'll often find summaries of your accounts, broken out by account type: revolving (such as credit cards), mortgages, and installment loans (like car loans). This section also provides a nice snapshot of total balances owed and how many credit inquiries you've had recently.
Part 3: Consumer statement
If you've asked for a comment to be put in your file for any reason, it will appear here. There's little reason to add your own commentary to the file, but some people have done so to try to explain why they messed up on their credit. They do so in the hopes that a potential creditor will consider this information and look more favorably on them as a result. Most creditors don't consider this information, though, and some actually regard it as a negative. It's probably not worth the bother.
Part 4: Account history information
You need to be concerned with all elements of your credit report, but the section that includes your account information is easily the most important. This section contains everything about your outstanding credit accounts, including mortgages, home equity loans, credit cards, personal loans, student loans, etc. Each creditor has the ability to report any of the following information on you, though not all of these fields are applicable for all accounts:
Company: The name of the company reporting the information about you. Check out everyone who is reporting about you, and make sure you know who the heck they are. You may have a listing for a company you've never done business with.
Account number: The account number as reported by the creditor, with the first few digits replaced with Xs for security reasons. Make sure that your account numbers match up with what's being reported.
Responsibility: This indicates whether the account is an individual account, joint account, or shared account. For joint and shared accounts, the information reported on your credit report is most likely reported exactly the same way for the other person named on the account.
Date opened: The date the account was first established with the creditor, not the date the account was first reported on by the creditor. They may be different, depending on how long it takes the creditor to start reporting about you.
Date reported: The last date an action was taken on the account. For all accounts in good standing, the date of last activity indicates the last month in which the creditor reported something about you. Typically, this is the last month in which you made payments before the loan was paid off. The account is typically closed on this date for installment loans, such as car, mortgage, or personal loans. Installment debt has a fixed number of payments over a certain period of time.
For revolving debt, like a credit card, the last activity will usually be the current month, unless either you or the credit card issuer has closed the account. Revolving debt does not have a set number of fixed payments, because the payments "revolve" around your use of the credit available to you.
Accounts with no negative remarks can stay on your credit report indefinitely. If an account has any negative remarks along the way -- even if you ended up paying responsibly -- the negative remarks must drop off after seven years.
For accounts not in good standing (which we'll discuss in more detail later), where you have stopped making payments even though you still owe money, the date of last activity is particularly important in determining when that account will fall off your credit report. Most negative marks on your report are no longer reported, or counted toward your score, seven years after the date of initial delinquency. This is very important when it comes to dealing with some collection agencies.
Type of account: Lists whether the account is real estate, installment debt, or revolving debt. (See above.)
Account status: This important line indicates whether you are paying on time, whether you are paying late, or whether some other negative action (such as a charged-off account) has taken place. The notation on the account typically describes the situation as of the date of last activity. For example, if you had a few late payments that got marked on your report six months ago, but you are currently paying on time, it will be marked "Current." Similarly, if you are 30, 60, 90 days or more behind on your payments, it may say so on this line. If an account has been charged off by a creditor to profit and loss, this line will be marked "Charged off as bad debt."
(A "charge-off" is an account that you stopped paying on, even though you still owed. The creditor is allowed to charge the debt off on its financial statements as "bad debt" after a certain amount of time spent trying to collect the debt from you. This is a really negative remark, and not something a creditor ever wants to see.)
High balance: The highest you've ever had the balance on the account, which is particularly relevant for credit cards -- especially if the "high balance" is larger than the "limit." Example: The current limit on your Visa card is $5,000, but your high balance is listed as $5,837. This generally means one of two things. Either you went way over the limit and had trouble bringing it below the limit (probably because of ridiculous late fees, over-the-limit fees, and huge interest rates), or the credit card lowered your limit for some reason. Neither scenario is good.
Limit: This is either the amount of the original installment loan, or your maximum credit line on a credit card. In the case of credit cards or store charge cards, the high credit numbers can be added up to see the total amount of credit available to you. Some lenders don't like to see this number stray too high, because it means that you might have too much credit at your disposal relative to your income.
Payment: This line shows your current obligations. It is assumed that the obligation is monthly, unless otherwise stated on the report. For installment loans, it will indicate what you currently pay each month. For credit cards and other revolving debt, it will indicate the minimum monthly payment. Creditors will add up all of your minimum monthly payments and installment payments to get an idea of how much you pay out each month. In order to get approved for some loans, like a mortgage, your typical debt-to-income ratio has to be below a certain percentage. You want to make sure that these numbers are being accurately reported.
Terms: In the case of an installment loan, the "terms" line will show how long the loan will be outstanding. In the case of a 30-year mortgage, this line will say "360 months."
Balance: Just like it sounds, this is the amount of your total outstanding balance. As we'll see shortly, part of the credit score is calculated based on the percentage of your available credit. Your total balances are divided by your total available credit (high credit) for a percentage expressed as your debt-to-income ratio. As a general rule, the lower your ratio, the better. The national average is around 20%, and you'd do well to stick to that ratio or below it.
Past due: Indicates, in dollars, how much your account is currently past due, if you are past due at all. If not, it will read $0.
Payment history: Some reports use graphical charts to show your recent payment history. On-time and late payments are indicated in different ways, depending on what format the report uses.
Condition: States whether the account is open, closed, closed by consumer, closed (transferred), or derogatory. For accounts you close, especially credit cards, you'll want the "closed by consumer" notation here.
Part 5: Credit inquiries
The next section of the report lists all credit inquiries made about you in the past two years. An inquiry is any request by someone to see information in your credit report. For the sake of simplicity, we'll break inquiries down into two groups: hard inquiries and soft inquiries.
Hard inquiries are made when you apply for credit with a lender. All other lenders who review your credit report can see a hard inquiry. A hard inquiry can lower your credit score, because it indicates that you are looking for more credit. The more hard inquiries you have, the more credit you're looking for, and the less desirable you are to other lenders who might want to lend you money.
Soft inquiries generally fall into three categories: promotional, account review, and consumer. They do not show up to anyone but you on the credit report. They also do not hurt your score in any way.
Some credit reports include soft inquiries, but others don't. So if you don't see them on your report, don't panic. But for those of you who have them, let's take soft inquiries one at a time for your reference:
Promotional: An inquiry made by a lender who wants to pre-approve you for a loan or credit card that you haven't even applied for or may not be interested in. You've probably gotten hundreds or thousands of these over the years, where a credit card company or mortgage broker is sending you leaflets saying that you're pre-approved for a platinum this or home equity that. These solicitations are usually the result of a promotional inquiry done on a credit file. The credit reporting agency will sell your name and address to the creditor making the inquiry and -- boom! -- a snail mail spam is born.
Account review: Your current creditors will occasionally review your credit file to see whether your situation has changed. If you've taken on a lot of debt since you borrowed from them, they might lower your credit limit to reduce their risk. Conversely, if you've paid off some other accounts and closed them out, maybe your credit card company will increase your limit or lower your rate as an enticement for you to spend more on their card. They cannot raise your rates or take any adverse action as a result of this kind of inquiry without telling you in writing.
Consumer review: This happens when you request your credit report, as you have here. This does not affect your score, and only you can see the inquiry.
Part 6: Collection accounts
This section of the report details any accounts that have been sent to a collection agency because the original creditor could not collect the money from you. Much of the information contained in this area is the same as what you found for each account in the Credit Information area detailed above.
Part 7: Public records
The last section of the report will contain any information related to creditworthiness that is found in the public domain. Here you'll find things such as bankruptcy information if you've ever filed for protection, liens against you, your marital status, judgments against you, etc. All of these things can speak to your reputation and creditworthiness.
Part 8: Other information
Most reports include space allotted for the person reporting about you to provide contact information or ways to obtain more information about your credit.
Reporting for duty
Before you can start improving your credit, you've got to know where it stands now. Understanding your credit report gives you the knowledge you'll need to stand on more equal footing with the credit bureaus, and it may point you toward the parts of your financial life that most need fixing.