How to Read a Credit Report, and Why You Really Need To

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Your credit reports from Equifax, Experian, and TransUnion contain important information about your debts and credit-seeking behavior that lenders can use when making decisions. You can obtain a copy of your credit report for free, and reading your credit report regularly can help catch errors and identity theft before it affects your ability to borrow money.

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What information is on your credit report and what you should look for

There are three major credit bureaus -- Equifax, Experian, and TransUnion -- that maintain credit reports for American consumers. In theory, the same information should appear on all three bureaus' reports, but in practice, there is often some variation. For example, a single late payment may have only been reported to two of the three bureaus.

Your credit report contains several categories of credit-related information, including:

  • Identifying information like your name, current and previous addresses, Social Security number, and birthdate. In this section, it's important to make sure there's nothing you don't recognize. For example, an address you don't know can be a sign that someone is using your information fraudulently and you should act immediately.
  • Information about your current and former employers. Just as with your identifying information, keep an eye out for employers you don't recognize.
  • Information about your current and former credit accounts, such as the type of account, when it was opened (and closed), your credit limit, current and high balances, and your payment history. Obviously, if a credit account is on your credit report and you have no idea how it got there, it's a major red flag. Also look at your balances -- if your credit card information has been compromised, a thief could use your card number to make purchases.
  • Credit inquiries, which happen when you apply for new credit. If you see a credit inquiry on your report and you didn't make it, there's a strong possibility that someone is trying to, or already has, stolen your identity and is attempting to obtain credit in your name.
  • Public records, such as bankruptcies, foreclosures, and legal judgements. With this, and the next category, make sure there are no accounts you don't recognize. Generally speaking, by the time you get to the point where a legal judgement has been issued, you'll know about it. However, that isn't always the case, so it's smart to check these periodically.
  • Collection accounts resulting from overdue debts.

It's also worth mentioning that most negative information comes off your credit after seven years, so pay attention to the dates associated with any adverse entries on your credit report. For example, if you have a collection account and the account first became delinquent eight years ago, it's a good idea to file a dispute to have it removed.

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What is not in your credit report

Pretty much everything that I didn't mention in the last section is nowhere to be found in your credit report. Some things that many consumers mistakenly believe are included in their credit report are:

  • Your salary.
  • Utility accounts, such as electric, phone, and water service. However, if one of these accounts gets sent to collections, you can be sure that the collection agency will report it.
  • Rent, in most cases.
  • Receipt of government assistance.

Credit reports vs. credit scores

Your credit report is a detailed list of information about your credit accounts, inquiries, and other information as stated above. A credit score is simply a numerical representation of your risk level, which is based on the information in your credit report and is designed to help lenders make lending decisions.

The most commonly used type of credit score is known as the FICO score, which uses a scale of 300-850 to approximate your risk level. Higher scores are better, and the average U.S. consumer has a FICO score of 700.

You have a separate FICO credit score for all three of your credit reports, as well as several specialized versions. For example, there is a version of the FICO score specifically designed to be used in auto lending.

How to get your credit report -- for free, and with no strings attached

There are several websites that give members access to their credit reports, or at least one of them, for free. For example, personal finance website WalletHub gives members access to their TransUnion credit report.

However, in order to be thorough, it's important to check all three versions of your credit report (Equifax, Experian, and TransUnion) on a regular basis.

By law, consumers are entitled to a free copy of each credit report once per year, which you can obtain at www.annualcreditreport.com. And you don't have to get all three at the same time -- my personal strategy is to look at a different one every four months, so I can get a more frequent look at my account data.

Why reading your credit report is so important

Reading your credit report regularly has always been important, but with the recent trend of high-profile data breaches, such as the massive incident with Equifax's consumer data, it's more important than ever.

Basically, the most important thing to do is to check for any information that you don't recognize. This doesn't just mean accounts that might have been fraudulently opened in your name -- it also means addresses, inquiries, employers, and variations of your name that don't look familiar. Any of these can be clues that your identity has been compromised, and you need to take appropriate steps.

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Matthew Frankel has no position in any of the stocks mentioned. The Motley Fool recommends Experian. The Motley Fool has a disclosure policy.