Many people give little thought to what’s on their credit report until the time comes to purchase a big-ticket item such as a new home or car. Even then, not everyone is aware of what’s on their report, especially if they’ve been paying their bills on time and have no reason to believe that their credit report contains any derogatory information. Unfortunately, those who apply for loans without knowing what’s on their credit report sometimes receive an unpleasant surprise when they’re offered a higher interest rate than they’d hoped for or are denied the loan altogether.
It’s also essential to keep in mind that credit reports aren’t only used by financial institutions that provide real estate and automobile loans — credit reports are routinely used by a variety of businesses for the purpose of making decisions about you. Although most consumers check their credit score on at least a somewhat regular basis using one of the many free services that calculate an informal credit score using data from the three major credit reporting bureaus, Experian, Transunion, and Equifax. however, these numbers can vary by bureau, and they don’t tell the whole story. Even though high scores indicate positive information on your credit report and low scores are a sign of the opposite, different businesses may use the information on your credit report in different ways.
How Your Credit Report is Used
Credit reports are commonly used to make lending decisions. Financial institutions want to make the best possible decisions about who they lend money to in order to minimize their losses. If you’ve got a checkered credit history involving multiple charge-offs, for instance, lenders are less likely to want to take a chance on you, and if they do decide to loan you money, that usually comes with higher interest rates than your counterparts with better credit scores. These types of lenders include mortgage lenders, auto loan providers, credit card companies, and retailers that offer in-house financing. Other entities with reason to check your credit report include the following:
It isn’t just about lending money, though — employers often pull credit reports on potential new hires, particularly in positions involving money-handling responsibilities. Employers often shy away from hiring those whose credit reports indicate a possibility that the applicant is experiencing financial distress and may be tempted as a result to dip into company funds. Even if the job doesn’t involve direct access to company coffers, the employer may nonetheless wish to get an idea if applicants have made good life choices by living responsibly. Also, a history of making late payments may be a signal that the applicant is disorganized. Employers also perform credit checks when the job involves access to sensitive customer data and may require them not only for new hires but for those who are up for promotion.
Both landlords and professional property owners often run credit checks as a part of the tenant approval process. Some only look for evictions and whether prospective tenants have any judgments against them for unpaid rent, while others take a bigger picture approach to get a sense of how potential tenants handle money. It’s also common for landlords to take debt load into consideration when making decisions on whether or not to rent to a particular tenant. For instance, those with high debt loads may not be able to meet rent obligations in the event that they run into roadblocks in their financial status. Landlords like to know that tenants can keep on paying rent even if they’re facing temporary setbacks such as job loss or unexpected expenses. Another red flag for landlords is a pending bankruptcy, which may serve as an indication that a particular tenant is a bad risk. Although many landlords also consider past bankruptcies, pending bankruptcy litigation is a bigger red flag because once it’s gone through the court, the tenant will be relieved of any back rent obligations. They also check to see if prospective tenants have a history of paying their bills on time or whether they’re consistently late.
What’s On a Credit Report?
Your credit report is a basic summary of how you’ve handled certain financial obligations over a period of years. They include late payments on credit cards, mobile phone contracts, auto loans, mortgages, and student loans. They also include anything that has been turned over to a collections agency for payment as well as bankruptcies and evictions. One common misconception is that nonpayment of utility bills will not affect your credit, but this isn’t the case. Because utility companies don’t directly report to credit bureaus, late payments won’t appear on your credit report, but if you fail to pay a bill altogether, the company will eventually turn the account over to a collections agency.
Collection agencies immediately report all accounts to at least one of the three major credit bureaus, which is why you should always try to work with creditors to help ensure that your account doesn’t get sold to an agency — making even small payments on a regular basis can prevent this from occurring. Another factor that strongly affects your credit score is credit usage. For instance, if you’re using more than 30% of your available credit, your score will be lower than if you were at 30% or under. By the same token, not using enough available credit may also have a negative impact on your credit score
What Can You Do about False Information on Your Credit Report?
Credit reports sometimes contain false information. This can happen as the result of identity theft, or it can simply be the result of clerical errors.
Whatever the reason, consumers have a right to demand the removal of false information on their credit report, and credit bureaus must notify creditors of the dispute within 30 days. If the information is found to be inaccurate, the creditor must notify all three credit bureaus of the error. You also have the right to request that the credit bureaus supply any company that has checked your credit rating during the past six months with a copy of the amended report. Negative items typically remain on credit reports for seven years, so if you are trying to clean up your credit prior to applying for a loan, be sure to dispute anything you don’t believe is factual. Keep in mind that even if a bill has been paid off in full, it still may show up on a credit report.
However, there are steps you can take even if the negative information on your credit report is correct. For instance, you have the right to contact the creditor and arrange to pay the bill in exchange for the removal of the item. If you aren’t able to resolve the issue, you can provide the credit bureaus with a written statement of your dispute that potential creditors can read when they check your report.
How to Get a Copy of Your Credit Report for Free
The Fair Credit Reporting Act allows consumers to obtain a free annual credit report from each of the credit bureaus — because not all lenders report to all three credit bureaus, it’s important to obtain individual credit reports from each of them — credit scores themselves can vary widely between the three bureaus. Although there are many services advertising free credit reports, the only one that’s authorized by federal mandate to disclose this information to consumers is the Federal Trade Commission. The first step in receiving a free copy of your credit report is to register for an account at annualcreditreport.com or call toll free number 1-877-322-8228. You’ll need to supply them with your legal name, your social security number, and your current address. You have the choice of requesting credit reports from all three bureaus at one time or spacing them throughout the year.
As a result of the pandemic, you’ll have the ability to receive a free credit report each week from each of the three credit bureaus. It’s particularly important to keep a sharp eye on your credit report during these troubling times because even though federal aid programs have granted temporary relief for those with certain types of federal debt, such as federally backed mortgages and some student loans, errors are nonetheless running rampant. Millions of people have been seeking assistance in recent months, and lenders have been overwhelmed by having to provide quick responses. As a result, numerous errors have occurred, and these errors have the potential to adversely affect your financial picture for years to come. Checking your credit report is just one of the many ways you can take the power over your financial health back into your own hands.