This was written by Olivia Kendall, a client happiness team lead at Earnest.
From the moment you take your first student loan or get your first credit card, you activate a paper trail of your experience with that debt. This is called a credit report—and over time this report will have a big impact on your financial life.
To get a sense of the reach of your credit report, it can be used by a potential employer to determine how responsible you are and can determine the rates on loans for education, cars, homes, and more. Bad credit can make it tough to get certain types of insurance, rent an apartment, and will certainly increase the cost of any loan you take.
Given their importance, it’s a good idea to learn how to navigate these reports early on in your money management career. Fortunately, there are free and easy ways to manage and monitor your credit standing. Hopefully, regular check-ins on your credit report will help you maintain good standing you so won’t have to worry about credit when you need it the most.
Is this like a financial report card for adults?
Sort of! Except it’s only about the credit portion of your financial life, e.g. everything to do with borrowing or owing money. It does not include information about your investments, income, or cash flow.
The information on your credit report comes from two places: creditors and public record. Creditors like banks or online lenders will report information about accounts you’ve opened. Other institutions, such as hospital billing departments, utility companies, and auto loan companies may also report information about your accounts. Property and court records offices will report on your activity as well (for example, if you purchase a home or if there is a tax lien on property you own.)
Where can you get your credit report?
First, know there are three major credit reporting agencies in the United States: Experian, Equifax, and Transunion. All three have a similar reporting structure, but there are some differences based on the information they receive. Creditors may not report information at the same speed, and some creditors only report to one or two bureaus, rather than all three. This means you will want to check your reports from all three on a regular basis.
Visit here to learn more about ordering your reports. Be wary of sites that say they will provide a free report, but require you to enter credit/debit card information. When it doubt, trusting sites that end with “.gov” (or that you are directed to by a .gov site) is a good bet!
You’re entitled to one free copy from each bureau every 12 months. If you’re keen on comparing information across the reports at a single moment in time (like your birthday or tax day), you may want to order all three reports at once. You could also spread them out throughout the year, if you anticipate needing to provide copies to third parties multiple times, or if you’re interested in checking on your credit history at different points during the year.
The Good, The Bad, and The Public
Credit reports are broken into four parts:
- Basic Information
- Potentially Negative Items
- Accounts in Good Standing
- Requests for Your Credit Report
This is relatively straight-forward. It usually includes the date of the report, a report ID number, and your first and last name. If you notice anything that looks unusual in this section, including any addresses you don’t recognize it may be a sign of fraudulent activity. The Federal Trade Commission has a succinct resource for immediate actions you can take if you think your identity has been stolen, located here.
Potentially Negative Items
This section includes things like:
- Judgments against you
- Accounts that have been sent to collections because your original creditor did not receive payments from you for an extended period.
- Credit accounts with potentially negative aspects (e.g., accounts that have been reported past due, that are in danger of defaulting, etc.)
It’s a good idea to go over this section carefully, and dispute anything that is inaccurate. For a clear, simple guide to disputing items on your credit report (there’s even a checklist), check out the Consumer Financial Protection Bureau’s page on the topic here.
If you know you’ve made some late payments, don’t panic! Credit is important, and it opens up doors for you but the sky will not fall if there’s something you need to fix on your report, or if it isn’t perfect. Do your best to communicate clearly and expediently with any creditor, if you feel you’re in danger of missing a payment. Follow up on any accounts you don’t recognize, or that display incorrect information. Remember, you have control over this section of the report and can take action to improve or correct it.
Accounts in Good Standing
This section will include any financial accounts you have that are humming along like a finely-tuned credit-boosting turbine. It shows information on accounts that have a regular record of full, on-time payments.
There are two separate types of accounts listed in this section:
- Installment debt
- Revolving debt
Installment debt describes loans that you pay back over a specific term, like student loans or mortgages. Generally, the payments for this type of debt are stable, and there is an end date to repayment in sight. Information like the loan term, monthly payment, and whether or not it is a joint account will appear in this section.
Revolving debt describes credit cards or lines of credit where you can borrow as much as you’d like, up to a certain point (known as you credit limit.) Revolving debt information on your credit report will include things like the highest balance the account has ever carried, recent payment information, and the credit limit. This section may be represented visually by a grid; Credit.com has a great breakdown of how to read these payment history grids here.
Requests for Credit History
Every time your credit history is reviewed, something called an “inquiry” is created on your report. Most credit reporting bureaus break this down into two categories:
- Requests initiated by you
- Requests that may not have been initiated by you, but are permitted under the Fair Credit Reporting Act
Requests initiated by you are generated during processes like applying for a mortgage or personal loan or to obtain a new phone number with a mobile company. Requests that may not have been initiated by you are generally for things like pre-approved offers; account monitoring is done by existing creditors, investment review, and requests by you for your own report. These may be hard or soft inquiries.
This last section of the reporting includes items like your full name, Social Security number, addresses associated with you, phone numbers registered to you, and current/past employers. Anything inaccurate here could be a sign of fraud, so check it carefully. If you notice something that’s not correct in this section, contact your creditors to ensure the information being reported to the bureaus is accurate. As the bureaus are essentially aggregators of credit and personal information about you, it’s best to contact the creditors directly when you can.
Understanding how to read your credit report is one of the first steps to building a solid financial foundation, and enjoying all of the benefits that come along with it. Figure out what monitoring strategy works for you, stay consistent and tie it to some financial goals for added motivation.
Happy reading! You got this.
Disclaimer: Earnest does not provide tax, legal, accounting, or financial planning advice. This blog post has been provided for informational purposes only and is not to be construed as financial advice. Consult with your financial advisor, attorney, or accountant for personalized advice.