Read and Understand Your Credit Report in 5 Quick Steps

how to read a credit report

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One of the most interesting debates within America must be on the pros and cons of annual wellness checks. One wing of the debate encourages the routine checks arguing that they solidify relationships with physicians and provide opportunities for critical preventive interventions. On the other side of the divide, pundits argue that the checks are time and money wasters. They are known to cause more harm than good.

Fortunately, that kind of debate hasn’t spilled over to financial wellness. More specifically, credit wellness.

It is crucial to regularly check your credit wellness, and one of the best ways to do it is by knowing how to read your credit report.

Under the Fair Credit Reporting Act, nationwide credit bureaus (Equifax, TransUnion, and Experian) have the mandate to provide consumers with a free credit report annually. However, few Americans bother to check their credit reports. Most don’t understand it.

Surveys conducted after recent data heist at Equifax show that, after the nationwide credit bureau reported data breaches for nearly 148 million Americans, less than half have taken steps to review their credit reports and prevent possible future fraud.

Could it be that you, like many Americans, don’t know how to read a credit report? Do you find it difficult to piece the elements together, and don’t understand the contents of the reports, how they can be used or how you can amend your report?

Read on and find out how to read and understand your credit report.

Know the Anatomy of a Credit Report

Your credit report is like a personal financial biography. It contains information regarding your credit history as reported by lenders. The report entails a list of the types of credit that you have, who has made an inquiry about your credit and information about any open and recently closed accounts.

It also provides details on how long the accounts have been open, which accounts are in good standing and which ones are adverse. It also details information on accounts you have co-signed and the status.

The credit report also contains personal information such as your name, social security number, telephone number, your current employer and where you live. It also contains information on matters of public record such as whether you’ve ever been arrested or sued and if you’ve ever filed for bankruptcy.

Understand Why it is Essential to Read Your Credit Report

It is important to read your credit report because a single negative entry in the report or an error on it can have significant repercussions. It can affect your ability to borrow money, rent or buy a  home,  lease a vehicle, qualify for privileged insurance rates and even qualify for certain jobs or roles.

All the entities which probe credit reports favor positive listings.

A good report gives you a good standing with lenders, insurers, potential employers, potential business partners and even state authorities. And reading your credit report is a crucial step in building and maintaining good credit.

Unlike the annual physical check-ups, there’s no dispute to this fact!

Periodic review of your credit report in conjunction with companies like Credit Repair will help you shape up your credit when you want to apply for new credit. It is also used by companies like Credit Sesame as a significant tool for strategizing recovery from past credit problems.

A credit report is often the first indicator of identity theft and other forms of card fraud.

Know the Important Parts of the Credit Report

Unfortunately, more than fifty percent of Americans don’t check their credit reports even when there’s a need for heightened awareness. Most people find the reports difficult to understand and are unable to decipher the information therein. However, it is critical to know how to read your credit report and understand what the contents mean, especially to your credit wellness.

The meat of the report is on the creditor information. It contains information on all your credit accounts, whether active or inactive. How long the accounts have been active and if there’s any that have been turned over to a collection agency or charged-off. This segment also includes important information such as the responsibility of the account holder (whether joint or individual), the account balance, your most recent payments and your credit limit.

If you have any reports of adverse accounts, the report also categorizes them as late payments, (for instance CUR WAS 30-1 meaning the account is current but was once late) outstanding balances ( code DELINQ – 60 signifies an account that is past due for 60 days.)  or severely past due accounts, including  code COLLECT – accounts referred to collection agencies or CHARGE OFF- unpaid balances that have been charged off. Other codes which denote adverse listing include FORECLO which indicate a property that was forcibly closed.

Adverse accounts will appear in your report for at least seven years after the date of clearance. As an additional bonus, the TransUnion Report provides an estimated date of removal. However, individuals who have charge-off or payment after charge-off accounts (accounts which creditors have found difficulty in collecting and have resulted in charging them off as losses) are not deleted from the report even if they are fully settled.

When checking the accounts in good standing, (often coded as CURR ACCT) you’ll need to be familiar with some terminologies. A revolving account describes accounts that you don’t have to settle the entire amount each month.  In these accounts,  you have the leeway to revolve your facility and pay additional interests on the revolved amount. Credit cards accounts are commonly found in this description. Installment accounts usually refer to regular loans from banks and other lenders, which have specific payments over a defined time period. Open accounts are not common in the national credit reports. But, other bureaus have the information. They refer to accounts that need full settlement each month such as utilities.

Know Who Uses the Credit Report and How

There are several businesses and agencies that have unique interests in your credit report and base their decisions on information from the credit reports.

The first and most obvious group of businesses is the lenders. Potential creditors will read your credit report to know whether or not to approve a loan application, know the safeguards to include, know what limit to apply (in terms of money and payback time) and what interest rate to apply.

Potential landlords will also request to read your credit report as part of the rental application. They mostly center on information such as if you’ve had instances of force closures, delinquencies or evictions which they use to make a final decision on whether to let out the property to you.

Another group that is interested in your credit report are the current employers and would be employers. Current employers check them out when considering promotions or before giving you a raise. Potential employers, on the other hand, can use information such as bankruptcy, high debt or delinquencies to make the decision on whether to hire or not to hire. However, in both cases, employers require your written consent before reading your credit report.

Insurers also seek to read your credit report so that they can make decisions on whether to extend an insurance facility and, what insurance premium rate to apply. People with adverse listings often attract higher rates for their insurance premiums.

There are other agencies that read your credit report, including debt collectors, government agencies and utility services. Each group uses it as a basis to make decisions on the services they provide.

What is the Effect of Enquiries on Your Credit Report?

Whenever an individual pulls your credit report, the transaction is registered under your report details. Inquiries can either be hard queries, by lenders, credit collection agencies and the like; or soft queries, for instance, when you read your credit report or when a marketing agency “pre-approves” you for a particular line of credit.

Hard queries have a negative effect on your overall credit score. If too many hard queries are made within a short time period, it counts negatively against your credit score.

Finally, You can Amend the Contents of the Credit Report

The information above will help you know how to read your credit report and understand its contents. It will forearm you in the most critical step you can take in managing your credit, correcting and disputing any mistakes.

If you find that your credit report contains errors, you can file a dispute. The Federal Trade Commission provides sample dispute letters to help in this process. Also, the three national credit bureaus provide sections (usually on the last page) for individuals to provide consumer statements. You can use this section to explain bankruptcy issues to prospective employers. These statements are voluntary and have no impact on the overall credit score. However, if you have a dispute that can potentially impact your credit report, and you don’t know how to go about repairing your credit, firms such as Lexington law provide specialized legal services to help you protect your credit reputation.

It is critical to review your credit report. You can start by taking advantage of the annual freebie from the three major credit bureaus. Then use the information in this article to know how to read a credit report and map your way to financial wellness.

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