It’s one of the most common questions we receive from our readers: What is a credit report? There’s a reason why so many people ask this question. Credit reports have the power to make or break your chances of getting approved for a mortgage, a car loan, and other types of financing.
The information compiled within your report also influences the interest rate you get from lenders, which affects the size of your monthly payments. So yes, they’re important.
But what is a credit report exactly, and why are they so important to mortgage lenders, auto lenders, and other creditors? In this lesson, we will examine every aspect of the consumer credit report. Let’s start with a quick definition.
What Is a Credit Report?
A credit report is simply a record of your borrowing history that dates back several years. You have three of these reports, because there are three companies that collect, organize and sell this information. They are TransUnion, Experian, and Equifax.
These three companies are also referred to as credit reporting agencies (CRAs) or bureaus. But don’t let the official-sounding terminology fool you. They are not associated with the government in any way. They are profit-driven companies. They make money by collecting credit information on consumers and selling it, in the form of a credit report, to 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 usage, personal loans, mortgage loans, student loans and more. They also include derogatory information relating to bankruptcies, foreclosures, debt collections and late payments.
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. They use this information when making their lending decisions. So it’s essentially a risk-analysis tool. Your reports (and, by extension, your credit scores) show lenders how you have managed your debt obligations in the past. This information helps creditors assess the level of risk you bring, as a borrower.
Recap: What is a credit report? It is a historical record of your borrowing activity. It compiles information relating to your current and previous credit accounts, loans, and other financial activities. Lenders use this information to determine (A) what kind of borrower you are, (B) whether or not they’re willing to lend you money, and (C) how much interest to charge you.
You Can Check It for Free
According to federal law, the credit reporting bureaus must give you one free credit report per calendar year. You have probably seen offers for “free” reports all over the Internet. But there is only one official website that is regulated by the Federal Trade Commission, 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 whole 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. They don’t rely on lenders, so they have no interest in the information lenders use to qualify borrowers.
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 used to pay for college tuition, or a credit card used for vacations or other large purchases. This is where the information in your credit 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. We will cover disputes in a follow-up to this lesson.
Summary: This article answers the question, What is a credit report? Despite the length of this tutorial, we have only scratched the surface of this topic. There is much more to learn about credit reports and scores, and how they affect you as a consumer. 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 the reporting industry. Their website is full of useful information, including a similar tutorial that answers the question: What is a credit report?