What’s a Credit Report & Why is it Important?

Your credit report is one of the most important aspects of your financial life.  It provides a history of your credit transactions with banks and other lenders.  Your credit report impacts your ability to get credit for things like buying a home, to getting the job that you want.

There are three main credit reporting bureaus that are the holders of your credit reports and they are:

  • Equifax
  • Experian
  • Transunion

The three credit bureaus documents the credit information lenders report to them regarding your credit activity.

What’s in a Credit Report?

A credit report is made up from several factors, and it’s not just about money that you borrow.

Your credit report includes several personal identifiable information such as:

  • your date of birth
  • name
  • current address
  • social security number
  • employment status

This information is updated whenever you apply for credit.

Credit accounts are included on your credit report, including credit cards, loans, and mortgages. Information provided for each credit account are:

  • dates you open the account
  • credit limits
  • payment dates
  • defaults
  • remaining balance
  • any collections action enforced

Credit reports also track credit applications from the last two years and a record of any company that accessed your report, regardless of the outcome of your application.

How is Your Credit Report Used?

Lenders use your credit report to determine whether you are credit risk or creditworthiness, and what your credit limit should be. Having a healthy credit report can make all the difference when applying for a loan, mortgage, or credit card. Some employers and insurance companies may also request to view your credit report.

Most banks and lenders use the FICO system.  When reviewing your credit, certain factors are weighted differently. For example, using the FICO system,  lenders use the following breakdown:

  • 35% payment history (timeliness of your payments)
  • 30% debt burden (how much debt you are carrying)
  • 15% length of credit history
  • 10% types of credit
  • 10% credit inquiries

Mainstream lenders will in most cases not extend credit if red flags are raised when considering these aspects of your credit report. Defaults, a high debt to income ratio, or a short credit history could prevent you from obtaining loans and lines of credit.

How is Your Credit Report Created When Borrowing for the First Time?

You start a credit history when you open and hold one credit account for more than six months. That account needs to be reported to one of the three main credit bureaus. The easiest way to get your first credit account is by aplying for a low-limit credit or charge card. Cards for building credit can be used for everyday purchases, which you can then pay within each month to avoid interest charges.

Starting with a small line of credit will allow you to build a good credit history. Understanding the importance of good credit will ensure that you have opportunities available when you need to borrow later in life.

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