Your credit report may be more important than you think. Do you know how to protect it?
Americans owe more than $15 trillion in household debt from credit cards to mortgages and student loans. That’s T-R-I-L-L-I-O-N and it all starts with one digital record, the credit report.
With so much money based on credit reports, there’s all kinds of information on the internet. Some of it’s there to help you understand your credit report…much of it’s there to push you into a new loan or credit card.
That’s why I wanted to put together this unbiased guide with everything you need to know about your credit report. I’ll cover the credit report basics as well as some of the most common questions I get from readers.
I put together a lot of information for the guide that you won’t find anywhere else. Information like what’s on the average credit report, some credit report misconceptions and what kind of credit score do you need to get the best rates.
What is a Credit Report?
When you apply for a loan, lenders need something on which to make their decision. They need some kind of an idea about the likelihood that you’ll repay the loan to determine whether to approve your application and what interest rate to charge.
Since it would be impossible for every lender to keep all this information on every person, it’s collected by three major credit bureaus. These three companies collect financial information about you from lenders to put it all together in one report.
Some lenders will report your information to all three credit report agencies while others report to only one. So instead of just one report, you actually have three credit reports.
The three credit bureaus are:
Equifax Credit Information Services, Inc
Address: P.O. Box 740241
Atlanta, GA 30374
TransUnion LLC Consumer Disclosure Center
Address: P.O. Box 2000
Chester, PA 19022
Experian National Consumer Assistance Center
Address: 475 Anton Blvd.
Costa Mesa, CA 92626
A credit report lists your financial accounts along with payment history for each. Each account shows how much you owe and your credit limit as well as the type of credit and when you opened the account.
Your credit report also contains court judgements against you and some personal information.
Having all your credit information together makes it easier for lenders to make a loan application decision. Getting a loan at a low rate isn’t the only thing your credit report is used for and it’s more important than you may think.
Why is a Credit Report so Important?
Credit reports are used to determine your credit score, a number between 300 to 850 developed by the Fair Isaac Corporation (FICO). I’ve put together a detailed credit score guide in another post but basically, a history of on-time payments on your credit report increases your score while bad marks on your report will decrease it.
Your credit score and the information on your credit report will determine whether you get approved for a loan and the interest rate on the debt.
Every lender has its own standards for cutoff credit scores for loans and how much interest to charge. Some banks will only extend credit to people with excellent scores while others specialize in loans to even the riskiest borrowers.
I’ve used data on peer-to-peer loans to show the average interest rate for different credit score ranges.
An interest rate of 7% on a $20,000 loan means approximately $1,400 a year in interest. That same loan at the 26.5% rate would mean interest of $5,300 during the first year and more than $16,284 in total interest payments on a five-year loan.
Your credit report is more than just a way to get loans though.
- Employers may pull your credit report during the hiring process. This is especially common for jobs in banking or financial services
- Insurers use an Auto Insurance Credit Score based on your credit report and people with bad credit pay an average of 91% more for insurance
- Potential landlords look at your credit score along with a rental application and may deny you if you’ve had past evictions or problems paying bills on time
Bad credit can lock you out of the financial system and mean thousands in additional interest on loans.
Credit Report Myths and Misconceptions: What’s not in your credit report
There are a lot of misconceptions about credit reports, what they include and how they’re used. The Fair Credit Reporting Act (FACT) regulates what goes in your credit report and how it can be used by lenders and others.
There’s a wide range of information that is not in your credit report, some of which cannot be used to determine loan approval or interest rates.
Some information that is not in your credit report:
- Race, gender or religion – It’s against the law to deny anyone a loan based on these or other personal information like age or ethnicity
- Marital status
- Age – Your age is not on your credit report but the length of time you’ve had credit is
- Salary – Income is not on your credit report but is asked on most loan applications
- Employer and employment history – Employment history is another one that is not on your credit report but is asked and used on loan applications
- Interest rates on loans – Lenders can’t see how much interest you are paying on other loans
- Participation in credit counseling – Credit counseling or other debt services are not released on your credit report
Lenders have fought to include more information on credit reports and are slowly adding other types of data. Some of the information below may be reported by one of the credit bureaus but not others and in some states.
Some things you didn’t know where on your report:
- Evictions – These are on your credit report in the form of public records or court judgements against you
- Child support payments are generally only reported when delinquent and reported by the municipality or collection agency
- Some utility and cell phone payments are also reported on your credit if they are delinquent or go to collections
A lot more things go on your credit report when you are late or default on your payments. It’s important to keep up to date with payments and keep them off your report!
What’s the Average Credit Report Look Like?
You won’t find much for ‘average credit report’ on the internet because the information isn’t often reported by credit bureaus or lenders. I took borrower information from Lending Club loans, which includes credit report data, to see what the average credit report looks like in America.
- Credit history of 17 years though 14% of Americans have less than 10 years’ credit history
- Approximately four in ten (39%) have had at least one credit inquiry in the last six months and 3% have had three or more inquiries
- The Average American has 12 open credit lines and a credit card balance of $16,368 and owes nearly $146,000 including mortgage and student loans
- Of those with a credit card balance, the average percent of their credit limit used is 51%
- Two in ten (20%) have at least one derogatory public record on their credit report and one in ten (13%) have filed bankruptcy in the last 10 years
- Just over two in ten people (21%) have at least one delinquency in the last two years. Most (79%) have no delinquencies but 3% have three or more.
- Those with a delinquent account in collections on their credit report owe an average of $4,600 on the account
- The Average American has a debt-to-income ratio of 21% which means two of every $10 they make goes to paying debt.
There is a lot more available on the average credit score which is around 695 as of January 2017. One in ten Americans (14%) have no credit score, mostly younger adults that have never used credit. A third of Americans (31%) have credit scores below 660 which is the cutoff for sub-prime credit and have extreme trouble getting loans with good rates.
The financial crisis destroyed a lot of credit reports but scores are slowly creeping back up as missed payments and bankruptcies fall off.
Most Common Credit Report Errors
Books-worth of information is collected in credit reports every day and there is bound to be mistakes. The Federal Trade Commission estimates that one-in-twenty (5%) of credit reports have errors though other estimates put it as high as one-in-four reports.
Just one missed payment on your credit report can decrease your credit score by 90- to 110-points and mean thousands in additional interest payments on new loans. That means it’s critical that you catch any credit report mistakes as soon as they appear.
Errors can go on your report for a number of reasons from mistakes in reporting by creditors to errors made by the credit reporting agencies themselves. A new case of identity theft is reported every two minutes in America, causing havoc for borrowers.
Some of the most common credit report mistakes include:
- Mistaken or Fraud Accounts – Check each account on your credit report to make sure it’s yours. Mistaken accounts from people with same name or living at same address are common after you’ve changed addresses.
- Outdated personal information – It’s important to check your personal information in each of the three credit reports each year, especially after you’ve moved.
- Wrong account details – Check specific information in each account on your credit report including credit limit and missed payments. Typing errors by creditors are some of the most common credit report mistakes and can destroy your credit. Also make sure that each credit account is labeled as the right type of debt.
How Does Bankruptcy Affect Your Credit?
Sometimes it can’t be avoided but filing bankruptcy is one of the biggest mistakes that will destroy your credit score. Chapter 7 bankruptcies can stay on your credit report for up to ten years and lock you out of the financial system.
The table below shows the estimated impact to your FICO credit score from different derogatory accounts.
You can see that a bankruptcy hits credit scores the hardest, decreasing your FICO score from 130 points to as much as 240 points. If you are able to get a loan, the interest rate will likely be extremely high and might just make matters worse.
Filing bankruptcy tends to hit people with higher credit scores harder because they have further to fall. Someone with excellent credit could see their FICO score fall more than 200 points after a bankruptcy. No matter how far your score falls after bankruptcy, it will be well below the sub-prime cutoff and will be a long time before you’re able to get decent rates again.
How Does a Missed Payment Affect Your Credit?
Being late on a credit card payment will not generally affect your credit score. Most credit card companies have a grace period before they report late payments on your credit report. You will have to pay a late fee but can usually avoid a hit to your score if paid within 30 days.
Being late for more than 60 days will be reported to the credit bureaus and can have a big effect on your credit score. The table above shows the effect of late mortgage payments but the same can be said for other types of debt.
Just one late payment of 90+ days can send even the best credit histories into sub-prime territory. Every 1% increase in interest means an extra $2,000 in interest on a $25,000 loan paid over ten years!
How Does an Eviction Affect Your Credit?
An eviction notice doesn’t go on your credit report but if it goes to court, the ruling against you will be reported to the credit bureaus as a public record. A public record stays on your credit report for up to seven years and is very difficult to get removed.
- Public records and other derogatory items on your credit report will decrease your FICO score and mean higher interest rates
- Many potential employers, especially for jobs in finance or banking, look closely at your credit report. Public records could be red flags and keep you from getting a job. The worst part is that many won’t say anything about it during the interview or will wait to after an interview to pull your credit, giving you no chance to respond.
- Having public records on your credit report for eviction can make it difficult to get approved on rental applications in the future
7 Critical Steps to Protect Your Credit Report
Cleaning up your credit report and improving your credit score can be frustratingly slow. It will first take changes in your credit report time to get reported. It can take years to recover your credit score after missed payments or other bad marks.
The table below from FICO shows an average of how long it takes to recover your credit score after different derogatory marks.
Again, bankruptcy takes the longest to clear from your credit report and for your score to start recovering. Even for minor missed payments though, it can take almost a year to get your credit score back.
- Check your three credit reports at least once a year for errors
- Write to the credit reporting agencies to remove any mistakes
- Try keeping your credit utilization ratio, your credit balance compared to limits, under 30%
- Set reminders so you make on-time payments
- Don’t avoid credit but don’t use so much that you can’t pay the bills
- Avoid multiple hard-inquiries before applying for another loan
- Don’t close credit accounts before applying for a loan
Whether you use credit often or plan to apply for a loan, your credit report is more important than you think. From rates on loans to getting a roof over your head, your credit report is a factor in many aspects of your financial life. Since it can take years to recover your credit score after a bad mark, it is very important to protect your credit report.