A Beginner’s Guide to Understanding Your Credit Report

If you want to become a homeowner someday, start monitoring your credit. The credit score weighs heavily in determining if you’ll be approved for a home loan, what type of home loan you can get, and the interest your loan will accrue. You’ll need to check out your credit report to find your credit score. Learn how in this guide to understanding your credit report.

How to Request Your Credit Report

Now, it’s easier than ever to request your credit report. Several sites help you get your credit report, including annualcreditreport.com, which allows you to request one official copy of your credit report each year for free. You will have to fill out some basic information about yourself, including your birthday, Social Security Number, and address.

Understanding Your Credit Score

Your credit score will range between 300 and 850. The number represents how responsible a user you have been of credit and the likelihood you can pay back a loan. The higher your score, the better your credit is, and the easier it will be for you to obtain home financing. You’ll also get superior loan terms for interest and down payments.

A credit score tries to summarize what’s in your detailed record by assigning numbers and percentages to different factors. It’s a quick way for potential lenders to judge your creditworthiness. But the only way for them to be reassured you are a good borrower is to review a complete record. That’s where the credit report comes into play.

The Four Parts to Every Credit Report

Three national credit bureaus calculate your credit score: Equifax, Experian, and TransUnion. A credit report should include a key that guides you through the information. Check this out first so you have a better understanding of your credit account.

Depending on the credit bureau the report comes from, the credit score and report may be slightly different. This is because different lenders and creditors report to different bureaus. But you can still expect every report to include some of the same info.

Identifying Information

First, your credit report will list some basic information about you, including your name and any aliases you have. This could include times a creditor misspelled your name or a name change if you married. You’ll also see your birthday, your current address, the address of any past residences, your phone numbers, and your SSN. Your employer and previous employers will be listed.

Accounts History

This portion of the report provides more details about the type of credit accounts, including credit cards and loans. You’ll see the names of your creditors, the corresponding account numbers, their credit limits and balances. The report’s payment history includes the status of your account, such as whether it’s past due. It may also show recently closed accounts or any outstanding debts you carry.

Credit reports are usually updated every 30 days. So, if you’ve opened a new account, made a credit application, or made a payment that hasn’t shown up yet, that’s probably why. Your credit history can greatly impact your chances of approval for a home loan. Lenders are looking to see if you have a trend toward late payments, defaulting on debt, or taking out too much debt.

Public Records

Ideally, the public records section shouldn’t have anything listed. But if you have bankruptcy, tax liens, or judgments in your past, those will show up here. These items remain on your credit report for seven to ten years. Note that having these on your report doesn’t automatically disqualify you from securing a home loan.

Inquiries

You can also see any people or organizations recently requesting to view your credit report. For example, a credit card company, landlord, or insurer might request access to your credit report.

Having too many requests over a short time frame can raise a red flag that you’re taking on too much debt. But what if you’re shopping around to find the best deal? Most reporting agencies will give you a short shopping window where multiple queries for the same type of debt (like an auto loan or home mortgage) will count only as one query.

What to Look for on Your Credit Report

If you see anything that needs to be corrected in your report, report it to the lender or collection agency as quickly as possible. Hopefully, it will be a simple mistake that can be easily remedied.

If you see something like multiple new lines of credit you never applied for or medical debt that isn’t yours, you are probably the victim of identity theft. This can severely damage your credit if you don’t address it immediately. Contact your bank, lender, and credit bureaus right away. You may also want to freeze your credit as an extra precaution.

Some will give you tips on what you can do to improve your history or score, like to reduce your credit usage or to pay off delinquent loans.

Discover Your Lending Options 

Before you speak with any mortgage lenders, go ahead and get the annual free copy of your credit report. Understanding your credit report will help position you for the best interest rates and for negotiating with mortgage lenders. See what the lenders will see and use the few months to boost the score. If you aren’t sure of your mortgage options, that’s okay! Talk to lenders about what loan products your score, plus income and budgeted down payment, qualify you for.

FAQs

What types of credit appear on your credit history report?

Your credit history report typically includes two main types of credit:

• Revolving Credit
  This type of credit allows you to borrow up to a specific limit and repay it over time, usually with a minimum monthly payment. The balance can vary from month to month. Common examples include credit cards and lines of credit.
• Installment Credit
  With an installment loan, you borrow and repay a specific amount in fixed, scheduled payments over a predetermined period. Examples include auto loans, student loans, and mortgage loans.

Each type of credit impacts your credit score differently, and a mix of credit types can benefit your credit profile.

However, some forms of credit don’t always appear on your credit history. Among these are rent payments, utility bill payments, and insurance payments. The major credit reporting agencies now will factor in rent payment history if it is provided to help boost your credit record.

What is a FICO Score vs. Vantage Score?

These are two credit scoring medals used to assess a borrower’s creditworthiness. Both use the same 350-850 scoring medal. Where they differ is how they do the credit score calculation and weigh the factors included in your credit score. For example, in VantageScore’s model, credit utilization (how high your credit card balance is compared to your credit limit) has a higher weight. FICO scores generally need accounts to be open for six months, but VantageScores can be calculated in as little as one month.

FICO scores tend to be more widely used by financial institutions offering home mortgages and other major loans.

Who are the major credit bureaus?

The three major credit bureaus in the United States are Equifax, TransUnion, and Experian. Since each credit agency independently gathers data, the information on your reports may vary slightly among them. The most important thing is to make sure their data is accurate and within a similar range. 

What is the difference between a hard inquiry and a soft inquiry?

Credit inquiries vary based on how much information a potential borrower wants to know about you before approving your loan or account. Soft inquiries will not impact your credit score. A company runs a credit check for non-lending reasons, like a lender pre-qualification inquiry, a landlord checking a borrower’s financial health, or a utility company checking for a history of late payments.

Hard inquiries will show up on your annual credit report because they are considered applications for new credit. Expect them any time you apply for a new credit card, an automobile loan, a home loan, or a personal loan. They can also happen if you ask for a credit limit increase. Multiple hard inquiries in a short window can look negative on your credit report. However, most credit scoring models do allow a grace period for multiple hard inquiries to allow you to shop around for the best interest rate.  When you’re making a significant purchase, try to make all your loan applications within this short window so it doesn’t overly impact your credit score.

What can I do if there are credit report errors?

If you find errors in the report, contact the credit bureau. They will likely ask for documents proving the mistake and a written letter explaining the reported error.  If you find an error with one credit agency, check the other nationwide credit bureaus. 

What is considered a healthy credit score?

A healthy credit score generally falls in the “Good” to “Excellent” range, which varies slightly depending on the scoring model (FICO or VantageScore). In the FICO credit scoring model, you want to aim for 740 or higher. For VantageScore, aim for 661 and higher. 

You receive the best credit scores for having an on-time payment history, a low credit utilization ratio, a healthy credit mix, and a low debt-to-credit ratio. Watch your credit card debt so you keep your activity and balances low. If you’re a younger adult with a shorter credit history, start with a small-balance credit card to get some credit activity going. The longer your credit history, the stronger your score will be.

How can I protect my credit report from potential identity theft?

Don’t wait until someone steals your identity to become a victim of identity theft. Take some proactive steps, starting with your credit report.

A credit freeze restricts access to your credit report, preventing new accounts from being opened in your name unless you temporarily lift the freeze. This is one of the most effective ways to prevent identity thieves from opening a line of credit in your name. Contact each of the three bureaus individually to place a security freeze, and you can lift or temporarily unfreeze it at any time if needed. 

Order your free annual credit report once a year to ensure all the data is accurate. Set it up for a milestone part of the year, like around New Year’s or Tax Day on April 15. Maybe even wrap it into all the renewals that happen around birthdays.

Identify theft protection services will monitor your credit for you and send alerts when they detect any suspicious activity. 

Banks also have options where you can receive fraud alerts or alerts on large transactions in your bank account. 

Be careful where you share your personal information. Don’t share vital information like Social Security or bank numbers unless absolutely necessary. Use two-factor authentication services for an extra layer of protection.

Updated November 2024