Credit Reports
You know that permanent record that everyone keeps threatening you about?
It's a real thing.
Your financial hijinks can end up on your credit report—and that doesn't go away, no matter how much you apologize.
Here's how it works: every month you pay bills, pay off your loans, and make payments on your mortgage and credit cards. Each time you open a new account or fail to make a payment on time, the companies, banks, and credit companies you work with send a note to the credit bureaus. The credit bureaus keep track of everything you do—wrong and right—and create a credit report and a credit score for you.
Your credit score (also known as a FICO score) is a three digit number that tells banks and lenders how good of a credit risk you are. Your credit report lists in detail how that number came to be.
It's the story of your (financial) life. Almost as thrilling as your memoir.
Why Should I Care?
You might not even know your credit score right now, but…you should. It has a pretty huge impact on your life. If you apply for any sort of loan, your lender (that's the bank, credit card company, store, or other person considering lending you money) will use your credit score to decide two things:
- Whether to lend you money or laugh you out of their office.
- How much interest to charge you if they do lend you cash.
Your credit score can mean big bucks.
Let's say you get a 30-year $200,000 mortgage, but you have a low FICO score of 620 (your score can go lower than that, but if it does your mortgage lender probably won't be returning your calls). With a score like that you might get a mortgage with a 4.81% APR and monthly payments of $1,051. Over the 30 years you have your mortgage, you'll pay about $178,000 in interest.
Yep: just in interest.
Let's say you wait a few years instead and improve your credit score to a perfect 850. Not only are you going to have an easier time landing a mortgage, but you're going to save a lot of money. You're a better credit risk, so you might land a mortgage with a 3.22% rate. That means monthly payments of $868 and total interest costs of about $112,000 on your mortgage.
That better credit score just saved you $66,000.
Reading Your Credit Report
To improve your credit score, you'll want to contact the credit bureaus and order your credit reports so that you can see where you might have problems.
The problem is that credit reports look like an accountant's office imploded between a few sheets of paper. There are numbers. And names. And more numbers. And all of it is written in a code that's hard to read.
To figure out what it all means, it's best to focus on a few specific parts of the report:
Report Number
If you notice a problem in your report and need to call the credit bureau, this is the ID number for your report.
Possible Negative Items
Here's where your credit score might be in trouble. This section lists anything like bankruptcy, non-payment of loans, collection actions, court rulings against you (if you default on a loan and a lender takes legal action against you), late payments, overdrawn accounts…basically all the naughty, naughty financial stuff that could hurt your score.
Status Information
A list of all the accounts in your name (including loans, bill payments, bank accounts, and all your financial stuff) and the payment status for each. Basically like Santa's naughty and nice list, but with your money.
A List of Accounts in Good Standing
Here are all the accounts you have that are shiny and well taken care of. If you pay your credit card bill perfectly each month, it ends up here in all its glory.
Details About the Types of Accounts
Each account on your credit report is listed as either an installment account or a revolving account. A revolving account is something that lets you keep borrowing 4eva as long as you keep paying. This is stuff like lines of credit and credit cards. Installment accounts are loans that you pay regularly on until they're all paid off. Car loans are installment loans, for example.
Requests
This part lists anyone who has asked for a credit report or your credit score. If you've applied for jobs, your employers might be checking up on you. If you've moved or applied for loans, your landlord or bank might be pulling up your credit score to see whether you're a good risk. Too many of these requests can lower your credit score for a little bit.
Personal Information
Hello, Big Brother. Credit bureaus list information about your past and current addresses, your past and current bosses, your name, your contact info, your social security number, and any other information they can dig up about you over the past seven years.
Yeah, it's kinda creepy.
Your Statement
If there's a problem with the report or someone reported something incorrectly, you can attach a statement explaining your side of the story on your credit report. It won't help your FICO score, but if a lender pulls your report they can at least see what the problem is.
How to Use All That Information
When you get your credit report, check for any problems: a lot of credit reports include mistakes. Maybe you paid your credit card on time last month but your payment was recorded late because of a computer glitch on their end. Maybe an identity thief opened up an account in your name and charged $10,000 to IKEA. Since the account is in your name, it looks like you didn't pay, even though you haven't touched a Swedish meatball or Allen wrench in years.
If you notice mistakes like late payments you know you made on time, contact the credit bureau and the company that filed the mark against you. Have the information removed from your report or include a personal statement on your report. If you notice accounts you don't recognize, contact the credit bureau and file a police report about identity theft.
You definitely don't want to have your credit score ruined by some IKEA-loving thief.