If you’re looking to build healthy credit, reviewing your credit report is the best place to start. Your credit report acts as a snapshot of your financial history, which can impact your ability to obtain credit, loans and other types of financing from lenders. Potential landlords, insurers and employers might also look at your credit report. However, an employer must request your signature before gaining access to your report.
Regardless of which institution is looking into your credit report, it’s important to know the types of insights they’ll glean. Here are several key points to help you understand the significance of your credit report.
Differentiate between your report and your score
“Credit reports include a history of how you have managed your accounts and if you have public records of a financial nature, such as judgments, bankruptcies, and tax liens,” says Maxine Sweet, vice president of public education for Experian. "Many utility companies and landlords don’t report unless the account has been turned over to collection and the collection agency reports it."
The major credit reporting bureaus—Equifax, Experian and TransUnion—aggregate your financial information, but they don’t actually rate or score your creditworthiness. Instead, individual banks and lenders rely on a variety of scoring models to evaluate your credit history and determine how the potential risk applies to their institution.
“A credit report does not rate your credit; it simply lays out the facts of your history,” Sweet says. “The score is trying to make your credit history meaningful in terms of risk.”
As a borrower, you can improve your creditworthiness by creating a stronger financial track record on your credit report. “You are not trying to change your score, you are trying to change the way you use credit so your credit history changes,” Sweet says.
Learn to speak credit report
Before you can change the way you approach credit, it’s important to know where your credit currently stands. Here, Sweet provides a breakdown of the four sections you’ll find on your credit report.
1) Identification: Your name, address, birth date and Social Security Number. “It does not affect your scores and it’s not unusual to have variations there,” she says. “If your name is misspelled, work to get it corrected, but don’t worry about it affecting your credit.”
2) Account history: A record of your borrowing and repayments. “Account history is the heart of the credit report,” she says. “That is what the risk is based on.” As a general rule, a history of on-time bill payments and minimal credit card debt works in your favor, while maxed-out cards and missed or late payments can negatively impact your score.
3) Public record items: If possible, it’s best to avoid having anything in this section. This section includes items such as a bankruptcy or a tax lien in your history, Sweet says. Having a public record item on your report doesn’t mean you can’t get credit, though. By taking small steps to repair your credit—such as getting a secured credit card and paying your bills faithfully—you can change the story on your credit report and improve your creditworthiness in the process.
4) Inquiries: Records of who has accessed your credit report, often called “hard” or “soft” inquiries. “A hard inquiry is when you have applied for services that could affect your financial risk—a new credit card, a student loan, a mortgage,” Sweet says. “Those become a part of your credit history as it is scored.”
Soft inquiries do not impact your financial risk, Sweet says. Getting a copy of your own report or receiving a pre-approved offer are both soft inquiries.
Understanding how lenders read your credit report is not only helpful, it’s empowering. A few small changes to your spending habits can make a big difference to the overall story, and give you peace of mind when applying for major purchases like a new car or your first home.