What is a credit report?

Simply put: A credit report is a summary of your credit history. It contains personal information from loan or credit card applications that you have filled out.

The report also lists your current and past loan and credit accounts and information about the payments you have made.

What's in a credit report?

Lots of personal stuff.

• Personal information Information from credit applications you've completed in the past, including:
  • your name
  • Social Security number
  • current and previous addresses
  • date of birth
  • employment history
• Credit history Information on all credit accounts you've opened or that list you as an authorized user:
  • date the account was opened
  • mount of loan or credit limit
  • loan or account balance
  • payment terms
  • payment history
  • on-time payments
  • late payments
  • missed payments
  • Inquiries

Your credit report will indicate whether any of these of these parties have asked about your credit:

• potential lenders
• insurance agencies
• companies that monitor for identity theft
• employers or potential employers
• landlord

Public Records Information from public records and courts of law may be included on your report. Public records information includes:

• bankruptcies
• overdue child support
• liens

The information in your credit report is managed by a credit reporting agency. In the United States, there are three major agencies: Equifax, Experian and TransUnion. These agencies continually receive information about the credit you use and the payments you make on your loans and credit accounts.

They also document every time your credit information is viewed by a third party.

For example

If you fill out an application to rent an apartment and the landlord checks your credit, that inquiry will appear on your report. Not everyone can view your report, however. It can only be accessed by someone with a legitimate reason to do so.

You should also know that credit reporting agencies do not collect personal information about your gender or ethnicity, your religious or political preferences, or your medical history. Criminal records are also not included on credit reports.

While credit reports focus on your financial history, not all of your history will appear in a report. Past credit mistakes and hardships are eventually removed from credit reports. Bankruptcies that are more than ten years old, for example, will no longer appear on a credit report -- neither will debts that have gone to collection more than seven years ago. Your checking and savings account information is also excluded from the report.

Why do I need a credit report?

Before you consider buying a property, we suggest that you ask for a copy of your credit report from one of the main credit reporting agencies. This is especially true if you plan to take out a loan.

Lenders will review your credit report to see how much experience you have with loans and credit and whether you are financially responsible. Your credit report plays a significant role in your lender's decision to approve or decline your loan.

So, before you even approach a lender for a home loan, it's best to know what your report looks like. You may also want to consider ordering a credit report from all three credit reporting agencies.

Each agency has its own way of compiling your credit information and calculating your credit rating. Some lenders review all three credit reports when deciding to grant a loan. If you've reviewed all three, you'll be able to answer any questions your lender may have.

Pay attention to these scenarios:

If your credit report shows unhealthy credit practices, such as late payments, you may want to work on improving your payment history before applying for a home loan. Paying bills on time is one of the most important things you can do to improve your credit standing.

If you find an error on your report, contact the reporting agency and file a dispute. In many cases, you can file a dispute online. It can take 30-90 days to remove an error from a report - which is another reason why it's smart to read your report early in the home-buying process.

If your credit report is minimal, you may not have enough credit history to be approved for a loan. You may want to consider opening a credit card account and making several on-time payments to increase your credit history.

How is my credit rating calculated?

When your lender requests a copy of your credit report, he will also request a credit score, a rating that agencies assign to you. It's based on the information in your report, and it's another way lenders determine the level of risk involved in loaning you money.

Credit reporting agencies calculate your score using its own set of complex equations. So, if your lender requests scores from multiple reporting agencies, it's very possible to have several different credit scores.

Credit reporting agencies generally keep their formulas for calculating credit scores under wraps. But, here are some of the ways information on your credit report affects your credit score:

What is a good credit rating?

The higher your credit score, the better. Though lenders look at several factors to determine whether to approve your loan, your credit score will be one of the most important influences in their decision.

In general, you will need a score of at least 650 to qualify for a standard loan. Depending on your lender's requirements and the economy, you may need a higher score to qualify.

If your score is low, try these tips:

1. Review your credit report for errors. According to some studies, almost 80% of credit reports contain inaccurate information. About 25% of credit reports contain serious errors that cause credit scores to decline. If your report has errors, be sure to contact the reporting agency to correct them.

2. If you were late making a payment due to special circumstances, such as a medical emergency, write a letter to the reporting agency explaining your situation. Ask that the special circumstance be documented on your credit report.

3. Pay your bills on-time for at least 6 months if you have a poor payment history.

4. Don't apply for credit unnecessarily. Remember that your credit score may decline with each application for new credit or a loan.

5. Keep your credit card balance below 35% of your credit card limit. For example, if your limit is $1,000, keep your balance less than $350.

6. Be patient. Unless you find multiple errors, there is no way to improve your credit score over night. Making your payments on-time over time is the best way to improve your credit score.

Smart Tips

• Keep your credit card balance at or below 35% of your credit limit to help boost your credit score.
• Sometimes you can increase your credit score by reducing your available credit. Ask your credit card company to lower the spending limit on your card. Don't be tempted to reduce available credit by closing old accounts. This may shorten your credit history and have a negative impact on your credit score.
• You can usually receive a free copy of your credit report if your loan is denied due to information in the report. Generally, you must request your copy from the reporting agency within a certain number of days.
• In some states, free or discounted credit reports are available to you each year. It's a good idea to check your report annually for errors. It's important to know that your credit score is not affected when you make an inquiry into your own report. For free or discounted reports, contact one of the reporting agencies for more information.
• If you notice an error while reviewing your report with your lender, your lender may be able to submit a dispute for you. In many cases, your lender will be able to resolve the dispute more quickly.
• Pay off as much debt as you can before applying for a home loan.
• Delay buying expensive items, such as a new car, until after you have purchased your home.
• Pay all of your income taxes in full and on-time.