What is a credit report and why is it important?

Credit report review and score

Have you ever applied for a credit card, been rejected, and subsequently wondered why? The answer lies in your credit report. Using information about your financial history, lenders determine whether you’re a safe credit bet. Understanding more about your credit report can help you determine which types of credit to apply for, as well as your chances of success.

What does a credit report contain?

Everyone’s credit report contains some basic information, including:

  • Your financial accounts and outstanding debts
  • Whether you make payments on time
  • How much credit is available to you and how much you’ve used
  • Whether a collector is collecting your outstanding debts
  • Liens, judgments, and bankruptcies
  • If you’re a property renter, it may also highlight whether you consistently pay your rent on time

Who uses your credit report?

In addition to mortgage lenders, loan lenders, and credit card companies, your credit report may be examined by:

  • Those offering cable/satellite TV or utility services
  • People renting apartments or homes
  • Some employers

Using the information on your credit report, these organizations will decide whether it’s safe to lend money to you, or whether you’re likely to consistently pay for their services on time. In addition, they may determine what payment terms and interest rates to offer you.

Using your free credit report

At some point, there’s a chance you’ll have to pay for your credit report. For the time being, by law you’re entitled to one free credit report from each of the three credit bureaus per year. For most people, this is likely to be enough to get your financial history in check.

Credit reports aren’t perfect; sometimes they contain inaccurate information. When you do get a free credit report, the first thing you need to do is check for inaccuracies. For example, if there are outstanding collections on there that you’ve already settled, write to the credit agency and get them corrected.

How often to take a look at your report

You don’t need to examine your credit report very often since it’s unlikely to change over short periods of time. It’s a good idea to take a look at least once a year. However, if you’re about to make a big financial decision – such as getting a mortgage – you might want to take another look before doing so. In addition, you may want to take a look if you’re about to seek employment, or if you suspect someone has been opening accounts in your name.

To look at your report, try one of the three main bureaus: Equifax, TransUnion, or Experian. There are lots of sites that offer free reports out there, but the 3 credit bureaus are the most accurate and they’re used by major companies, which means they offer a true reflection of your financial history.

Improving your credit report

Some people have an attractive credit report, whereas others turn lenders and companies off immediately. If yours could use a little work, try the following:

  • Make sure all the information your report contains is accurate
  • Settle debts and make regular payments to collectors
  • Try to maintain relationships with lenders for as long as possible
  • Meet your financial obligations
  • Make sure you have plenty of credit available, but not too much debt

With an enhanced credit report, you stand a stronger chance of securing finance for all your purchases—big and small.