Anyone who has ever applied for any type of credit like a credit card, a mortgage, or even a cell phone has had their credit report checked. If the report says that you are late paying bills or have a ton of debt, you could have to pay a higher interest rate or even get turned down altogether.
Scott Mitch, CEO of an Identity Theft Protection service, says it quite well: the "credit bureaus are at the center of our credit-eco system in the US And it's hard to think about a set of companies that are more instrumental in the life that we live ".
What is a Credit Report?
A credit report is basically a file that a Credit Reporting Agency (CRA) keeps on you. After what many people think, your credit score does not say whether you have "good credit" or "bad credit" and if you are a risk. That determination is made by the lenders. All a CRA does is collect the information and then sell it. The information on your credit report is an important factor, but may not be the only one that determinates whether the loan is made.
Another misconception is that your credit report is a "credit score" (you've probably heard of FICO). The credit score is a tool that lenders used based on a special formula that does use the information in your credit report, but the score itself is not part of the report.
Who can access your Credit Report?
Who can see your credit report is outlined by the Fair Credit Reporting Act. Anyone who accesses it must have a "permitted reason" to do so. The groups that can see it are:
- Potential Lenders – Credit card companies, mortgage lenders, landlords, and other lenders are the most common. Whenever they request to see your report, a note of that becomes actually part of the report (called a "hard inquiry"). More on that later.
- Potential employers – A special (less detailed) version of your report. They must have written permission to do so. All they are able to see is how you make payments and handle debt, which (theoretically in their mind) shows your trustworthiness. This is a "soft inquiry" which does not show up on your report.
- Pre-approved credit card offerers – They can not actually see your credit report (thankfully), but they can pull a specially screened list to see if you qualify. This is also a "soft inquiry" which does not appear on your report.
- You – Obviously, you are able to see your own report.
What is a Credit Report?
- Credit history – Bill paying history (late payments etc.), balances, credit limits, open or closed accounts
- Personal information – Name, address history, work history, social security number
- Public information – Information from public records such as bankruptcies, court orders, tax liens, etc.
- Inquiries – Any company who has done a "hard inquiry" shows up. This is why you want to be careful in how many credit cards you sign up for or loans you request, because every time a company runs a credit check, that becomes part of your report (whether you take the loan or not).
- Disputes – If there is a dispute over something on a report, both your statements and the lender's will be noted.
What do creditors look for?
Potential lenders make the decision whether or not to extend credit based on the contents of the report. Here are some of the things that they look for:
What do you do if you see errors?
According to the Public Interest Research Group, 79% of credit reports have errors, and 25% have errors significant enough to make lenders refund credit.
It's recommended that you check your credit report at least on a yearly basis. If you find a mistake, it can be a long and arduous process to fix it, but it's important that you do. To correct the error:
- Collect and prepare as much documentation as you can to support the correction
- Contact the relevant credit bureau, explaining what the error is. I recommend doing this via registered letter and including copies of all the documentation just to save back and forth later.
- Send a similar letter to the creditor as they will need to be involved sooner or later
Remember that neither the CRA nor the creditor have any vested interest in correcting the report, so expect some frustration when going through this process. Make sure you make note of every interaction with them and record dates, times, and who you talked to.
Legally, the CRA has 30 days to investigate your claim, so keep on them and be persistent.
Your credit report is one of the most important files in your life, and no one has motivation to make sure it is accurate but you. The more you know about it, the more power you have.