Credit Report Basics Explained: Credit 101

Why Is My Credit Report Important?

Let’s start with the obvious reasons, then address a few you may not always think about.

First and foremost, almost everyone at some point in their lives needs to borrow money. Very few of us buy homes with cash, and most of us finance our vehicles as well. Credit cards are a reality of modern life, as are department store cards of various sorts (with all of their brand-specific perks), medical cards (which allow you to pay out your expenses over time when dealing with participating institutions), and online transactions which rely on the good faith of both parties. You don’t have to master credit report basics to recognize that your credit score and full credit report substantially impact each of these events for better or worse.

Your credit score also comes into play any time you’re looking to rent an apartment, apply for a job, buy car insurance, or even sign up for a mobile phone plan. The Head of Human Resources may not tell you that they almost called you back in for another round until they saw what looked to them like severe irresponsibility as reflected by a 3-digit code you may not even know, but it happens. You won’t be given a document explaining that you don’t qualify for a promotional rate because you’ve had credit card trouble in the past, but agents quietly confess this is a thing (sometimes after a drink or two).

Huffpost did an interesting report on this recently, focused on the impact of individual credit scores on home insurance rates of all things. Here’s what they found:

For the second year in a row, a Quadrant Information Services study… found that if you have a fair -- or median -- credit score, you may pay 32 percent more for home insurance on average than someone with excellent credit… But if you have poor credit, rather than excellent credit, your premium may increase by an average of 100 percent (up from 91 percent in 2014)…

A credit-based insurance score is different from the credit score you may be used to seeing when applying for a loan or a new credit card. According to Lamont Boyd, insurance underwriting expert at FICO, your credit-based insurance score is derived from a combination of factors in your credit reports and is used to help insurers better determine the likelihood you will file a future claim…

“It has been proven statistically time and time again that the way someone manages his or her credit correlates very strongly to whether or not they will have a future homeowner loss,” Boyd says. “Not that every insurer uses this data the same way. They all have their unique models. But the underlying principle is the same across the board.”

How much credit affects your home insurance rate may surprise you,” (Huffpost, November 8th, 2016)

We can debate whether or not it’s fair, but it’s not so different from requiring students to pass their 9th grade reading test before they can apply for a driver’s license or looking at report cards to decide which babysitter to trust. In early American history, most men couldn’t vote unless they could establish that they were landowners and that they’d used that land to provide for themselves and those in their care. No one wanted you in charge of the nation if you couldn’t feed your own wife and children.

Justified or not, credit scores and credit reports often serve as unofficial measures of your personal reliability. Some (not me) would even say they reflect your overall worth – at least in financial terms. I’m not here to rationalize it; it’s just an uncomfortable part of credit report basics we’d all do well to consider.

What Sort Of Information Is On My Credit Report?

Let’s begin by clarifying the distinction between a credit score and a credit report. We often use the terms interchangeably, but while they’re related, they’re not the same thing by any stretch.

Your credit score is a 3-digit number which is intended to reflect your general credit-worthiness in the most boiled down, context-free, easy-to-access format possible. We’ll talk a bit more about those in a bit. Your credit report, on the other hand, will almost always include some rather extensive details about very specific parts of your life so far. Both your credit score and your credit report can vary with the source consulted and both change over time based on your financial behavior.

Here are some key credit report basics in terms of what your report typically contains...

The most fundamental are those related to the basic question of who you are. What’s your full name? Has it ever changed due to marriage or divorce? Have you ever had it changed for other reasons? If you name has multiple spellings or variations, those are likely to show up on your report as well. Hopefully they’re all tied to your correct Social Security Number, which is on the report as well and should help anchor it all together.

Your address and all past addresses are part of that identification as well. Are you the same Robert Simmons who lived on 1341 Ochre Drive AND the Bobby Simons who attended Purdue University in the early 1990s? Don’t be surprised if related addresses pop up as well. When we bought a house a few years ago, my ex-wife’s parents’ address turned up on my credit report, probably through the same series of connections that lead to all the mail I get for my long-deceased mother who’s never even lived in this state (and who’s certainly not staying with us now).

Your current phone number and most or all of your past phone numbers typically show up, along with every place you’ve ever legally been employed since the womb. Spouses may or may not be listed, depending on whether or not they were directly involved in any of your past credit transactions.

You probably won’t be surprised to discover that the remainder of your report is devoted to your credit history. That’s the heart of credit report basics, and worth thinking about for a moment.

What Does A Credit Report Say About My Actual Credit History?

Every loan you’ve ever taken out and (hopefully) repaid, every credit card, every home, car, or small business you’ve financed, along with your current banking balances and what you owe to everyone, everywhere, is fair game for a credit report. Bankruptcies, of course, are on your credit report, as are any previous occasions on which you’ve applied for credit.

“Soft” inquiries won’t show up – passive checks done as part of applying for a job, renting an apartment, or you checking your own credit report. “Hard” inquiries, however – actual efforts to secure a loan – do show up. These are expected, within reason, but excessive efforts to borrow or to open up new credit cards in a short time period will draw negative attention.

Of particular interest are the number of times you’ve been reported as “past due.” Most lenders use standard categories for this – 30+ days, 60+ days, 90+ days, and “in default” or “turned over to collections” or some variation thereof.

What Important Information Is NOT On My Credit Report?

Please note that your credit report does not distinguish between a period of reckless behavior and drunken shenanigans after your divorce in which you said “screw it” and started burning your bills for warmth after you quit your job or the alternative period in which you faced multiple personal crises beyond your control and – despite your best efforts – were unable to stay on top of things until the storm had passed and you picked up that third job.

In other words, your credit report doesn’t address why you were late, or why you defaulted. It doesn’t indicate whether you’re a “good person” or a complete mess. Lenders won’t always ask, and may not always care, but it might be a good idea to be prepared to explain any rough patches in your credit history – especially if there’s a persuasive reason to believe those events are behind you and unlikely to occur again.

Those aren’t the only credit report basics you should consider before applying for a loan. Your report won’t normally include whether or not you’re married, how much you have in the bank, or what skills and education you possess. It doesn’t know your hopes, your plans, or your personal skill set, or have any idea how those things might impact the likelihood you’re a good credit risk at this exact moment.

Again, many lenders won’t ask, and many may not care, but if you have a compelling reason for borrowing and there are good reasons to expect you’ll make your payments on time, and those things aren’t necessarily obvious from your credit report, have that documentation available.Run those numbers ahead of time. Be ready to politely but competently make your case.

Keep in mind that this is the 21st century. Of course your credit matters, and there are situations in which it’s possible no one is going to roll the dice on you. But this is not your father’s financial world. This is not your mother’s loan process. The variety of legitimate online lenders who specialize in creative arrangements and flexible terms means you don’t have to go begging for capital. You’re the customer – let them compete for your business. It’s just that going in fully prepared and informed makes the process go much more smoothly and results in better terms for you.

Is My Credit Report the Same No Matter Who Runs It?

No. Here’s something we often overlook in credit report basics: your scores should be in the same basic range no matter the source, but the specifics will vary with who’s running the report. They’ll also change from one month to the next, since your credit report isn’t a static document sitting in a folder somewhere waiting to be referenced, but an as-requested report computed each time someone asks.

One major reason for the differences is that not every lender reports to all three of the major credit agencies – Equifax, Experian, and Transunion. Some do, and some report to two of the three. Others, however, only report to whichever one they use. This is more likely to be the case with, say... department store cards or local auto dealers who do their own financing or work through a local lender instead of using the manufacturer or one of the national organizations.

Another key difference is the type of score actually being produced. Your FICO score is the most familiar number used for major credit reporting. It reduces your entire credit history to a 3-digit number between 300 – 850 for easy reference by potential lenders. The big three credit agencies, on the other hand, have their own similar (but not quite the same) system – your Vantage Score. It produces a result between 300 – 850 as well, making things doubly confusing. For most purposes, your credit score will be very close under either system, but it can mean that while you’re in the “good credit” category according to one, you’re a tiny bit “iffy” to another.

Specific industries have their own tweaks to the same basic reporting system. If you’re trying to finance a car, the lender certainly cares about your overall credit rating. But if they notice that most of your delinquencies seem to come from medical bills or the year it took to get your name off your ex-wife’s house, while you’ve been pretty reliable on the last three vehicles you purchased, they’re likely to consider you more favorably than the mortgage company might.

There’s one more rather sobering factor you should consider as part of your credit report basics. Disparities sometimes creep in due to low-tech problems like typos or someone misspelling your name. Sometimes this means that one credit agency knows all about those unpaid credit cards while the other thinks those are owed by someone name ‘Lobert’. It’s not unheard of for folks with similar names to find information on their report which isn’t theirs at all – especially if their Social Security Numbers are coincidentally similar.

I’m not looking to panic you – just to emphasize one of the more tedious realities of credit report basics: CHECK YOUR REPORT FOR ERRORS. If you find any, do whatever you can to correct them. Sometimes this goes more easily than other times, but it matters – and you might as well do it NOW, before you really, really need your report to be accurate.

How Do I Dispute Information On My Credit Report?

Errors on credit reports are far too common. This is most likely the result of the unfathomable amount of information being juggled – largely by algorithms and underpaid data entry clerks – before bits-and-pieces of the sum total of human knowledge are pulled from the ether to form your presumed credit history. (Sorry to make credit report basics sound so The Matrix; it’s just that there’s a LOT of information about a LOT of people using a LOT of numbers bouncing around out there. It’s really a miracle they get as much of it right as they do.)

If you find information on a credit report you believe to be incorrect, don’t just let it go or decide you’ll deal with it later. Start by documenting the correct information if at all possible. Is there an account you paid off which shows as in default? An application for credit you never made? Gather your specifics and make sure you’re comfortable with the information before you begin the process.

First, contact the reporting credit agency or agencies. Most sources recommend you do this old school – sending an actual paper communication through the mail to a physical address. Every agency has information on how to do this on their websites. It allows you to make copies for yourself, or even to ask for notification of delivery if you’re concerned about its safe arrival.

Include as many specifics as are relevant, but avoid accusations or emotionalism. They’re probably not “out to get you” and they definitely don’t need to hear about what a deadbeat your ex was or be asked how THEY’D like to try to raise four kids while battling liver cancer.

I’m not saying those things don’t matter, only that they won’t help resolve the issue efficiently. I’m just looking out for you, my friend.

If the error involves reporting by a lending institution – a department store card, an old landlord, or whatever – reach out to them as well. Again, paper and ink, envelopes and stamps, paper trails and organized record-keeping. Professional tone, clear information, no accusation. We’re not trying to get hits on Twitter here; we’re trying to resolve a credit reporting error so we can get a better rate when we refinance in a few years to remodel the upstairs bathroom.

Allow 30 days or so before following up if you don’t hear anything. It wouldn’t hurt to check the same report again before you assume nothing’s happened. Obviously they SHOULD contact you if the problem is fixed, but… well, you’ve met people, right? And every organization involved is to some extent made up of people who may or may not meet our highest hopes. Such is life in modern times.

On the other hand, we have cable and pizza delivery, so maybe it balances out.

How Can I Check My Credit Report?

That’s an easy one. We can help you out with that right now.

And no, we won’t charge you or spam you with offers or add you to any lists you don’t want to be on. Our business model is to provide you with services and education, then to be available if you’d like help connecting with lenders who specialize in your particular needs or circumstances. It’s an optimistic approach, to be sure – but we like helping people first and trusting this plays out long-term in everyone’s best interest.

Plus, unlike that sketchy ‘payday loans’ place down the street, we can sleep at night.

What Can I Do To Improve My Credit Score?

How Can I Improve My Credit Report?

The answers to these questions are essentially the same. Before we run through some credit report basics related to improving those results, you might want to check your score and your full report again – especially if it’s been awhile since you last looked. As CNBC reported just last year, the major credit reporting agencies have made a few changes to how they’re compiling their reports. In most cases, this has meant slightly higher scores and better reports than before:

The reason behind the potential boost is a change in the way the three major credit rating firms deal with negative credit information, including unpaid bills and debts. Some of new practices by Equifax, Experian and TransUnion include more updated reporting, such as noting when an overdue balance has been paid, along with the exclusion of certain debts and items of questionable accuracy…

Library fines and traffic tickets are also being scrubbed. Medical debts that have been or are being paid by insurance companies will disappear from profiles. In response to these changes, Americans’ credit reports are already showing fewer blemishes and scores are rising.

Your credit score may have just gone up. Here’s why.” (CNBC, August 25th, 2018)

Hey, let’s take any win we can get, right? Now, back to credit report basics and improving your report even further…

First, understand the “Five C’s” of credit – your Credit Character, your Credit Capacity, your potential Collateral, your existing Capital, and your anticipated Conditions. My colleague Brandy explains these “Five C’s” in one of my favorite pieces on the topic ever. Start by checking it out.

Second, do the obvious things. Pay your bills on time. Don’t overextend yourself. Put together a realistic household budget and stick to it. Don’t fall for “quick fixes” or “silver bullets” on this one. As my mentor Ethan Taub explains, “it probably took you a long time to mess up your credit. It also takes some time to improve it.”

Honestly, if nothing else, just avoid creating new problems for yourself for a few years and the old messes will fall off by themselves. And keep in mind that what constitutes a “good credit score” is relative, depending on your circumstances, your immediate goals, and from whence you’ve come. If you’re going the right direction, cut yourself some slack, even if it’s taking a while. You’re doing what you can do, right?

Third, consider debt consolidation. If you’re having trouble keeping up with multiple debts from multiple sources, a personal loan could streamline your monthly obligations and reduce your overall interest rates. Personal loans used wisely can dramatically improve your credit score and add positive information to your credit reports. Just make sure you don’t pay off high interest cards with a personal loan only to run them back up again while you’re still paying off the loan, or otherwise dig yourself into a situation worse than before.

That’s not just credit report basics, my friend – that’s personal finance basics. But it happens, I assure you. More than I care to think about.

Fourth, maintain your perspective. Always keep in mind that your credit score and credit reports are tools to help you move forward and accomplish your goals. We want to improve them so they better serve our needs – not because we’re here to serve theirs.

If you decide to start a small business and it means risking some points if it goes south, measure the risk, by all means. Discuss it with those you cherish and trust. But don’t forsake your vision because if it fails it will lower your credit score. That’s backwards.

If you want to go back to school in order to improve yourself or change your economic outlook long-term, then you should absolutely look for ways to make that happen. Don’t be reckless – look at your options and consider alternatives where you can. But student loans don’t impact your credit score any more or less than any other loan. In some circumstances, lenders viewing your full credit report may be more understanding of difficulties with student loans than they would if you were consistently late with your car payments or credit card obligations.

Credit scores matter. Credit reports are important. But they’re tools, not final goals.

Finally, consider a complete rebuild. If you’re saddled with a rocky credit history – or no credit history at all.

These aren’t things I’d recommend for those of us with adequate or decent credit in order to “game the system.” If you’ve read my thoughts on such things before, you know I’m not a fan of that sort of manipulation, not to mention that it doesn’t usually work the way you’ve been promised by the flashy website or overpriced consultant.

Learn the practical ways to lay a foundation for decent credit from the ground up, taking advantage of entirely legitimate options and methods for building (or rebuilding) credit. Some, like secured credit cards, are things with which you may be familiar already. Others, like the “credit builder loan,” may be new to you. Either way, this one’s definitely worth a gander.

Conclusion

I hope you feel like you have a better handle on credit report basics than you did when we started. If you’re looking for a better way to organize your budget, track your personal tax obligations, manage your debt, explore the world of credit, or if you just need to consult with reliable lenders about the right personal loan for you, let us know.

We don’t actually loan money or charge you for anything, but we’re pretty good at providing tools and insight for you to do with as you see fit. We’re also pretty much amazing at connecting you with legit online lenders who can talk details with you. After that, it’s entirely up to you how you proceed. Just remember that while we’ll never tell you what to do, we’re here to help with whatever you decide.