Understanding Credit Reports

Credit reports can seem complicated at first, but I can help break them down for you! A credit report is essentially a detailed record of your credit history, compiled by credit reporting agencies (like Equifax, Experian, or TransUnion in the U.S.). 

Reporting is not required. It is 100% voluntary. It actually costs data furnishers money to report their information on their customers to the credit bureaus. At the end of the day, data furnishers pay to report to the credit bureaus because they are able to access the databases the credit bureaus have. 

A data furnisher may report to all three credit bureaus, or they can choose to report to just one credit bureau. They could also decide to stop reporting altogether.  You must remember that the credit bureaus are just data collectors. Credit bureaus only know what is reported to them.  They just receive data. They do not review, they do not search, and they do not investigate the data.

By law, any information that is added to a consumer’s credit file must be verified first. Unfortunately. they don’t verify information they add to credit files. Which results in many errors.

Errors are the only piece of information that can and according to law, must be removed from a credit file. The only one who will know that an error exist on a credit report, is the consumer. If they are not brought to attention they will remain until the data ages off a file, reaches the “statute of limitations”.

Errors on credit reports need to be corrected because they can have significant consequences for your financial life. Here’s why:

1. Risk of Identity Theft: It’s a good idea to check your report regularly to ensure accuracy and spot potential signs of identity theft. Errors like unknown accounts or unfamiliar transactions could indicate identity theft. Correcting these ensures your credit report reflects only your activity.

2. Affects Loan and Credit Approvals: Lenders use your credit report to assess your reliability when it comes to repaying debts. They rely on accurate credit reports to assess your creditworthiness. Mistakes might give a false impression of your financial behavior, making it harder to get approved for loans, credit cards, or mortgages.

3. Impact on Credit Scores: A credit score is based on your credit file. Incorrect information, such as late payments you never made or accounts you don’t own, can lower your credit score. A lower score can lead to higher interest rates or loan denials.

 Here’s what they typically include:

1. Personal Information: Basic details like your name, address, Social Security number, and date of birth to identify you.

2. Credit Accounts: A list of your open and closed credit accounts, such as credit cards, loans, and mortgages. It shows account balances, credit limits, payment history, and whether payments were made on time.

3. Credit Inquiries: Records of when lenders or others have reviewed your credit report. There are two types:

   • Hard inquiries, which happen when you apply for new credit (and may affect your credit score).

   • Soft inquiries, like when you check your own credit report (these don’t impact your score).

4. Public Records: Any relevant financial legal issues, such as bankruptcies, foreclosures, or liens.

5. Negative Items: These include late payments, collections, and other marks that may hurt your credit score.