What Is a Credit Report, and Why Are They Important?

What is a credit report? What kind of information does it contain? Why are they important? These are three of the most common questions we get from our readers on this particular subject. There's a reason for this popularity. Credit reports have the power to make or break your chances of getting approved for a loan. This applies to personal loans, car loans, mortgage loans and more. The information in your credit report also influences the interest rate you get from lenders, which affects the size of your payments.

But what is a credit report, and what does it include? Why do lenders care about them? In this lesson, we will examine every aspect of the consumer credit report. Let's start with a quick definition.

Quick read: In a hurry? Here's the gist of this article in 100 words or less. Your credit report is an electronic file that contains information relating to your borrowing history. It shows how you have borrowed and repaid money in the past. It includes information on all of your current credit accounts (including loans), as well as the payment history for each account. It also shows negative events such as bankruptcies, debt collections, tax liens and such. The information in your file typically dates back 7 - 10 years. It is used to produce a three-digit number known as a credit score.

What Is a Credit Report?

A credit report is a record of your credit history, dating back several years. You have three of these reports, because there are three companies that collect this kind of information. They are TransUnion, Experian, and Equifax.

These companies are also referred to as credit reporting agencies (CRAs) or "bureaus." But don't let those words fool you. They are not associated with the government in any way. They are profit-driven companies. They earn money by collecting information on consumers and selling it banks and creditors.

So essentially, a credit report is a history of how a person has borrowed and repaid money in the past. It includes account and payment information relating to credit card use, personal loans, mortgage loans, student loans and more. These files also include derogatory information relating to bankruptcies, foreclosures, debt collections and late payments.

Why Are They Important to Consumers?

Now you can see why credit reports are so important to lenders. They show how well (or how poorly) a person has repaid his or her debts in the past. Obviously, this is something a bank or creditor wants to know.

Recap: What is a credit report? It is a historical record of your borrowing activity. It compiles information relating to your current and previous accounts, loans, and financial activities. Lenders use this information to determine what kind of borrower you are.

The Kind of Information it Includes

Let's move on to question #2: What kind of information does my credit report contain? The document itself will vary from one reporting company to the next. They are three separate companies with their own data-collection and processing procedures. So don't be surprised if they look slightly different. But while the format may change, the types of information included within the report is the same for all three bureaus.

These files contain a wide variety of information relating to your history as a borrower. Any time you borrow money or have credit extended to you in some way, it is reported to the credit reporting agencies and shows up in your report. The data usually dates back 7 - 10 years, in keeping with federal laws.

Learn more: Here is a more detailed look at the information found within your file.

You Can Check It for Free

According to federal regulations, the reporting bureaus must give you one free credit report per calendar year. You will see offers for "free" reports all over the Internet. But there is only one official website that is regulated by the Federal Trade Commission (FTC), and that website is AnnualCreditReport.com. Through this site, you can request your free reports from all three bureaus. The question is, do you really need to?

Some people go their entire lives without ever checking their credit reports. For instance, people who don't use credit cards or loans really have no reason to worry about this information. But most consumers rely on financing at some point in their lives. This might be a mortgage loan used to buy a house, a student loan to pay for college tuition, or a credit card used for vacations or other large purchases. This is where the information in your report becomes more important.

Bottom line: If you plan to apply for some kind of financing in the near future, you should review your credit reports for accuracy. If you find any inaccurate or erroneous information within your file, you should dispute it through the company that produced that particular report.

How It Is Used to Produce a Credit Score

The previous section explains what a credit report is and what it includes. In this section, we will discuss how the information contained within your file is used to produce a score.

A consumer credit score is a three-digit number that is derived from information contained within the aforementioned reports. The data from your credit file is processed through a computational formula to produce this three-digit number. The FICO scoring model is the one most commonly used by lenders, but there are other scoring systems as well.

You have three of these scores for the same reason you have three different reports. There is one for each of the reporting companies -- Experian, TransUnion and Equifax.

These scores give lenders and creditors a quick and easy way to evaluate you as a borrower. Instead of wading through all of the information contained within your credit reports, they can simply use this three-digit number to get a sense of what kind of borrower you are (or have been in the past).

If you have mostly positive information in your reports, meaning you pay your bills on time, you will likely have a high score. The higher the better. A good credit score will help you get approved for loans, and it will also help you qualify for lower interest rates on those loans. So it is doubly important. Here's an article that explains how to get a good score.

Summary: This article answers the question, What is a credit report and what does it include? Despite the length of this tutorial, we have only scratched the surface of this topic. If you would like to learn more about this subject, I recommend visiting the Federal Trade Commission (FTC) website. It is the FTC that regulates this industry. Their website is full of useful information on credit reporting.