How to Decode Your Credit Report (and Understand What Lenders are Looking for)

How to Decode Your Credit Report (and Understand What Lenders are Looking for)

Unless you’re a seasoned financial professional, understanding your credit report can feel a lot like deciphering a foreign language. But considering the weight it can carry in determining your creditworthiness to a lender, it’s worth taking a few extra minutes to sort through the details.

Follow this guide to better understand what you’re looking at and catch any red flags before a lender does.

Credit Report Basics

While each of the three credit reporting agencies (Experian, TransUnion, and Equifax) present the information differently, your credit report will always have the same categories of information, including:

Personal information: This includes your name, date of birth, social security number, addresses tied to that information, and any other pertinent information to identify you.

Financial Accounts: This information might be split into different sections (accounts in good standing and accounts in default, for example), but your report should have record of each of your financial accounts, both open and closed.

Payment History: One of the more important pieces of information attached to your financial accounts is your payment history and whether you’ve had any late payments or accounts in delinquency.

Credit Inquiries: Inquiries into your credit are collected and displayed on your report. While some inquiries, like for pre-approval offers, aren’t viewable by everyone, you should be able to see them all.

Public Information: If you have had past bankruptcies, liens, judgements, foreclosures, or accounts in collections, this information is also displayed on your report.

What Are Lenders Looking For?

Credit Score

If you’ve ordered your free credit report from each of the three credit reporting agencies, you won’t see a credit score attached to it. However, this is an important piece that can determine if you are approved, the type and size of the loan, as well as the interest rate. Here are a few guidelines:

  • FHA Loans
    Minimum score of 580 with 3.5% down.
  • VA Loans
    Minimum score of 620-640 depending on the lender, with 0% down.
  • Conventional Loans
    Minimum score of 620. You need a score of 680 to avoid jumping through additional hoops. A score of 740+ is ideal for landing the best rates.

Age of Credit

Your report tells the age of your credit by averaging out the length of time your accounts have been open. So while your oldest account may have been established 20 years ago, an account opened just a week ago could drag down that average drastically.

Payment History

Payment history makes up 35% of your FICO credit score — for good reason. It paints a clear picture of how you’ve handled credit in the past, showing how many payments you’ve missed and how recently these missed payments occurred.

Lenders want to see how risky of a borrower you may be and how likely it is that you will pay your mortgage on time, every time.

Bankruptcies, Liens, Judgements, Collections

Large financial events like a bankruptcy or an account currently in collections can signal significant financial distress for lenders. These events should carry less weight the longer it has been since they occurred, but you may still need to have an explanation ready.

Credit Utilization Ratio

One large indication of whether you are capable of taking on the financial burden of a mortgage is your credit utilization ratio. This is a percentage determined by taking your current debt level divided by your available credit. While there isn’t a hard rule, many suggest keeping this below 30%.

Number of Credit Inquiries

Lenders don’t want to see signs that you are trying to obtain credit from several different sources right before you try to secure a mortgage loan. So even if inquiries didn’t turn into new accounts, it can still signal an issue.

Types of Credit Used

The more variation you have in your credit history, the more experienced you appear to a potential lender. So having a mix of both installment loans (i.e. auto loans, student loans, mortgages) and revolving credit (i.e. credit cards, lines of credit) can help.

Check and Double Check All Information Reported

 If you aren’t already convinced of the importance of checking your credit report before seeking loan approval, consider this: In 2016, there were 43,000 consumer complaints made to the Consumer Financial Protection Bureau about credit report errors. The bottom line? Chances are high you might find a mistake on yours.

Make sure you pay careful attention to both the basics (like your name, social security number, etc.) and all of the nitty gritty details (like credit limits, account statuses according to your creditors, etc.). If you find any errors, here's how to dispute them.

By - Kayla Albert

Disputing Errors on Credit Reports

Your credit report contains information about where you live, how you pay your bills, and whether you’ve been sued or arrested, or have filed for bankruptcy. Credit reporting companies sell the information in your report to creditors, insurers, employers, and other businesses that use it to evaluate your applications for credit, insurance, employment, or renting a home. The federal Fair Credit Reporting Act (FCRA) promotes the accuracy and privacy of information in the files of the nation’s credit reporting companies.

Some financial advisors and consumer advocates suggest that you review your credit report periodically. Why?

  • Because the information it contains affects whether you can get a loan — and how much you will have to pay to borrow money.
  • To make sure the information is accurate, complete, and up-to-date before you apply for a loan for a major purchase like a house or car, buy insurance, or apply for a job.
  • To help guard against identity theft. That’s when someone uses your personal information — like your name, your Social Security number, or your credit card number — to commit fraud. Identity thieves may use your information to open a new credit card account in your name. Then, when they don’t pay the bills, the delinquent account is reported on your credit report. Inaccurate information like that could affect your ability to get credit, insurance, or even a job.

How to Order Your Free Report

An amendment to the FCRA requires each of the nationwide credit reporting companies — Equifax, Experian, and TransUnion — to provide you with a free copy of your credit report, at your request, once every 12 months.

The three nationwide credit reporting companies have set up one website, toll-free telephone number, and mailing address through which you can order your free annual report. To order, visit annualcreditreport.com, call 1-877-322-8228, or complete the Annual Credit Report Request Form and mail it to:

Annual Credit Report Request Service
P.O. Box 105281
Atlanta, GA 30348-5281

Do not contact the three nationwide credit reporting companies individually.

You may order your reports from each of the three nationwide credit reporting companies at the same time, or you can order from only one or two. The FCRA allows you to order one free copy from each of the nationwide credit reporting companies every 12 months.

You need to provide your name, address, Social Security number, and date of birth. If you have moved in the last two years, you may have to provide your previous address. To maintain the security of your file, each nationwide credit reporting company may ask you for some information that only you would know, like the amount of your monthly mortgage payment. Each company may ask you for different information because the information each has in your file may come from different sources.

Other situations where you might be eligible for a free report

You’re also entitled to a free report if a company takes adverse action against you, such as denying your application for credit, insurance, or employment, based on information in your report. You must ask for your report within 60 days of receiving notice of the action. The notice will give you the name, address, and phone number of the credit reporting company.

You’re also entitled to one free report a year if you’re unemployed and plan to look for a job within 60 days; if you’re on welfare; or if your report is inaccurate because of fraud, including identity theft.

Otherwise, a credit reporting company may charge you a reasonable amount for another copy of your report within a 12-month period. To buy a copy of your report, contact the three credit report companies:

Experian-1-888-397-3742
www.experian.com 

TransUnion-1-800-916-8800
www.transunion.com

Equifax-1-800-685-1111
www.equifax.com

Correcting Errors

Under the FCRA, both the credit reporting company and the information provider (that is, the person, company, or organization that provides information about you to a credit reporting company) are responsible for correcting inaccurate or incomplete information in your report. To take advantage of all your rights under this law, contact the credit reporting company and the information provider.

Step One

Tell the credit reporting company, in writing, what information you think is inaccurate. Use our sample dispute letter. Include copies (NOT originals) of documents that support your position. In addition to providing your complete name and address, your letter should clearly identify each item in your report you dispute, state the facts and explain why you dispute the information, and request that it be removed or corrected. You may want to enclose a copy of your report with the items in question circled. Send your letter by certified mail, “return receipt requested,” so you can document what the credit reporting company received. Keep copies of your dispute letter and enclosures.

Credit reporting companies must investigate the items in question — usually within 30 days — unless they consider your dispute frivolous. They also must forward all the relevant data you provide about the inaccuracy to the organization that provided the information. After the information provider receives notice of a dispute from the credit reporting company, it must investigate, review the relevant information, and report the results back to the credit reporting company. If the information provider finds the disputed information is inaccurate, it must notify all three nationwide credit reporting companies so they can correct the information in your file.

When the investigation is complete, the credit reporting company must give you the results in writing and a free copy of your report if the dispute results in a change. This free report does not count as your annual free report. If an item is changed or deleted, the credit reporting company cannot put the disputed information back in your file unless the information provider verifies that it is accurate and complete. The credit reporting company also must send you written notice that includes the name, address, and phone number of the information provider.

If you ask, the credit reporting company must send notices of any corrections to anyone who received your report in the past six months. You can have a corrected copy of your report sent to anyone who received a copy during the past two years for employment purposes.

If an investigation doesn’t resolve your dispute with the credit reporting company, you can ask that a statement of the dispute be included in your file and in future reports. You also can ask the credit reporting company to provide your statement to anyone who received a copy of your report in the recent past. You can expect to pay a fee for this service.

Step Two

Tell the information provider (that is, the person, company, or organization that provides information about you to a credit reporting company), in writing, that you dispute an item in your credit report. Use this sample dispute letter. Include copies (NOT originals) of documents that support your position. If the provider listed an address on your credit report, send your letter to that address. If no address is listed, contact the provider and ask for the correct address to send your letter. If the information provider does not give you an address, you can send your letter to any business address for that provider.

If the provider continues to report the item you disputed to a credit reporting company, it must let the credit reporting company know about your dispute. And if you are correct — that is, if the information you dispute is found to be inaccurate or incomplete — the information provider must tell the credit reporting company to update or delete the item.

About Your File

Your credit file may not reflect all your credit accounts. Although most national department store and all-purpose bank credit card accounts will be included in your file, not all creditors supply information to credit reporting companies: some local retailers, credit unions, travel, entertainment, and gasoline card companies are among the creditors that don’t.

When negative information in your report is accurate, only the passage of time can assure its removal. A credit reporting company can report most accurate negative information for seven years and bankruptcy information for 10 years. Information about an unpaid judgment against you can be reported for seven years or until the statute of limitations runs out, whichever is longer. There is no time limit on reporting: information about criminal convictions; information reported in response to your application for a job that pays more than $75,000 a year; and information reported because you’ve applied for more than $150,000 worth of credit or life insurance. There is a standard method for calculating the seven-year reporting period. Generally, the period runs from the date that the event took place.

By - F.T.C.

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