Through April 20, 2021, Experian, TransUnion and Equifax will offer all U.S. consumers free weekly credit reports through AnnualCreditReport.com to help you protect your financial health during the sudden and unprecedented hardship caused by COVID-19.
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A credit report documents your history managing debt. Lenders, landlords and others may consult your report, alongside the credit score based on it, when deciding how much to charge you in interest or security deposits—or whether to do business with you at all.
A credit report is important because it can affect your finances and ability to achieve long-term dreams such as owning a home, buying a car or even getting your dream job. When it's filled with positive information, a credit report helps you put your best face forward as a responsible borrower who knows how to manage their finances.
In the U.S., there are three major credit bureaus—Experian, TransUnion and Equifax—that maintain credit reports for consumers based primarily on information reported by creditors. By carefully managing your debt, paying bills on time and avoiding high credit balances, you can help make sure your credit report is pristine.
What Is a Credit Report?
A credit report compiles your history of borrowing and repaying money in the form of loans credit cards. It documents when you opened each account, the amount you've borrowed, and records up to 10 years of monthly payments on each account, noting whether each payment was made on time, or 30- 60- or 90-days late.
Accounts paid in full as agreed are noted in your credit report, as are missteps you may have made in the course of repaying debts: If you default on a loan, that is noted on your credit report as well, along with associated negative consequences such as repossession (as on a car or boat loan), sale of the account to a collections agency (in the case of a credit card account or personal loan), or foreclosure (in the case of a mortgage loan). If you file bankruptcy, that is noted in your credit report too.
Credit reports also log credit inquiries—requests to view your credit history from lenders and other entities permitted by law to see your credit history.
Why Does Your Credit Report Matter?
Your credit report is a key component of your overall financial health. While it doesn't include information like your employment history or income, it can provide companies a clue to your money management skills. If it's maintained well, a credit report can open doors to new opportunities. Here's how:
Your Credit Report Can Affect Your Ability to Borrow
Lenders typically check one or more of your credit reports when considering you for a loan or credit application, and review them for any signs that doing business with you could be risky. Each lender has its own tolerance for risk, but all typically view late payments as grounds for caution—the more numerous they are, and the more recent they are, the greater the cause for concern.
Lenders may view serious negative entries, such as accounts in collection, repossessions or foreclosures as even more worrying—and bankruptcies, which stay on your credit report for seven to 10 years, are considered graver still. Some lenders refuse to do business with any applicant with a bankruptcy on their credit report; others will only consider applicants after their bankruptcies are several years old.
Credit Reports Are the Basis for Credit Scores
Your credit scores are three-digit numbers that predict your statistical likelihood of missing payments on an account in the near future. Complex software known as credit scoring models calculate these scores by analyzing debt and payment information included in your credit report.
The most popular scoring models, FICO® Score☉ and VantageScore®, generate scores on a range of 300 to 850. With these models, higher scores denote lower likelihood of defaulting on a loan. Credit scores distill the information in your credit reports into a number creditors can easily understand.
Lenders Use Credit Scores to Help Make Lending Decisions
Credit scores help lenders set the interest rates they charge on various loans, and whether to take on a borrower as a customer at all. For example, a lender might make it a policy to turn down loan applicants with credit scores below 500, offer its best available rates to applicants with credit scores above 750, and steer applicants with scores between 500 and 750 into various loan options, generally assigning higher interest rates to applicants with lower scores.
Landlords, Insurers and Others May Check Your Credit Reports
If you're renting an apartment, a landlord or property manager might view a spotty payment history as grounds for turning you away or charging you a high security deposit. Similarly, phone and cable companies might charge you a high deposit on their hardware, or even decline your business if your credit report worries them. In many states, a good credit history could save you money on insurance or make you a more appealing applicant.
Your Credit Report Can Help You Spot Credit Fraud
Left unchecked, credit fraud could temporarily damage your credit, and require lots of time and hassle to correct. Unusual credit report entries, such as hard inquiries you don't recognize or accounts you didn't open, can indicate criminal efforts to borrow money or buy goods in your name. Spotting those signs early and taking immediate action to address them can spare you major headaches.
Because credit reports and credit scores can affect your life in many ways, it's a good idea to keep aware of them. Checking your credit report and credit scores regularly, and monitoring them for any changes can help you know how lenders will view your applications, and prevent unpleasant surprises.
Does Checking Your Credit Report Affect Your Credit Score?
Credit inquiries are recorded in your credit report when a lender, landlord, utility company or any other legally permissible entity (including you) looks at your credit report or requests that a credit score be calculated based on that report. Credit reports distinguish between hard inquiries and soft inquiries. A hard inquiry is one made in response to your application for a loan or credit, while a soft inquiry doesn't necessarily mean a credit application is under consideration. Checking your own credit report does not hurt your credit score.
Hard inquiries, which often signify the intention to take on new debt, are statistical indicators of greater repayment risk, so credit scoring models might respond to them with a temporary reduction in credit score. Soft inquiries—including checking your credit report or credit score yourself—are not risk indicators, and they have no effect on credit scores.
Inquiries are responsible for about just 10% of your FICO® Score, so they have relatively little influence compared with other factors that determine your credit scores, including:
- Payment history: The most important contributor to a good credit score is keeping up with your monthly payments. Payment history accounts for 35% of your FICO® Score.
- Credit utilization: Your credit utilization ratio is the sum of all your outstanding credit card balances divided by the sum of all your credit limits, expressed as a percentage. Lenders consider utilization greater than about 30% as a sign you might be getting overextended, so ratios over that amount tend to lower credit scores. Credit utilization accounts for 30% of your FICO® Score.
- Credit history: Lenders value experienced credit managers, so all other factors being equal, individuals with longer credit histories tend to have higher credit scores than those with shorter histories. The length of your credit accounts for about 15% of your FICO® Score.
- Credit mix: People with top credit scores often carry a wide range of credit accounts, perhaps including a car loan, credit cards, student loan, mortgage and so on. Credit scoring models tend to elevate the scores of individuals with a wide range of credit accounts. Credit mix accounts for 10% of your FICO® Score.
How to Check and Monitor Your Credit for Free
Experian makes it easy to check your credit report for free, and also offers a free service that provides access to credit reports and credit scores, and monitors your Experian credit report and alerts you anytime it changes. The service also makes it seamless to report and correct any inaccuracies that may turn up in your credit report—a rare occurrence, but one that can have negative consequences for your credit score. You can also get your credit reports for free from all three bureaus through AnnualCreditReport.com.
Credit reports are a key part of the lending system that makes it possible to borrow money when you need it, to finance a car, a home, an education or a new refrigerator or a dream vacation. Your credit report reflects your borrowing and repayment habits, and it's wise to pay attention to how others may see it.