Credit Check, your Credit Report and how it works.

What is a credit report?

A credit report is a collection of information on how you pay your bills, how you repay loans, how much credit you have available, what your monthly debts are and any other information a lender needs to decide whether you are a good credit risk or a bad credit risk. The report itself does not state whether you are a good or bad risk, it simply provides the potential lender with the data to make an accurate decision themselves. Lenders base their decision on different criteria so it helps having all the information available to them.

Information that makes up your credit report:

• Personal Information. This includes your name, current and previous address, ID number, telephone number, birth date, current and previous employers and in some cases your spouse’s name.
• Credit History. This includes your bill paying history with any bank, retail stores, finance companies, mortgage companies and any other company or person who has given you credit. It also includes information such as when each of your accounts was opened, what type of accounts you have, what the amount of the loan is, what your monthly payment is and if you have closed the account or paid off the loan. The late payments and missed payment also reflects here.
• Public records. This includes any information that may indicate your credit worthiness such as tax liens, court judgments and bankruptcy.
• Report inquiries. This includes all creditors who have received your credit report and anyone who were authorised to see your credit report. It also contains a list of companies that have received your name and address so that they can offer you credit, they do not necessarily view your report but they receive your name if you meet their criteria. This is where the pre-approved credit offers come from.
• Dispute statements. This is statements you have made disputing information that appears on the report. Most credit bureaus allow consumers and creditors to make statements.

What do not appear on most credit reports:

• Your bank account balances
• Race
• Religion
• Your health but medical bills can show up as debt
• Criminal records
• Your income
• Your driving records

What is your credit score?

It is easy to get confused between your credit report and your credit score but these are two completely different things. Credit scores are based on formulas that use the information in your credit report but they do not form part of your report. Different formulas are used by different creditors but it basically provides them with a three digit number making it easy to make a decision about your creditworthiness.

How creditors interpret your credit report

As mentioned above your credit report only provides the history of your business with creditors but there is information that can look innocent to you and not so innocent to potential creditors. Thus it is important to keep your credit report up to date and accurate.

• Debt in relation to income. Creditors might not give you a loan or the best deal available if your unsecured credit card debt is more than 20 percent of your annual income. Reduce your debt to income ratio and you will be able to receive better rates on loans you take out.
• Missed payments. Your repayment history makes a big difference in whether you will get a loan or not. You should at least make the minimum payment or consolidate your debt in order to reduce your payments and possibly your interest as well. These missed payments stay on your report for seven years even if you have settled all your debt before that.
• Maxed out credit cards. This is a big red flag and indicates that you may be in bad debt and unable to make any repayments. In many cases creditors will see maxed out credits cards as an attempt to move money around from one card to the next.
• Open credit accounts. It is important to know that accounts you don’t use still count towards your total credit available. These open accounts can indicate to creditors that you can easily put yourself in financial trouble with all the readily available credit. Remember not to close your oldest credit card because it has the most history. Cutting up the credit card does not mean the account is closed, you need to call and ask for the account to be closed.
• Inquiries. Each time you apply for a new credit card potential creditors can see these applications on your credit report. The applications can imply that you are in financial trouble where you need a lot of credit or you are planning on taking on large debt. Both of these scenarios can flag you as a high credit risk.

It is easy to see why you need to be careful when applying for credit and think it through before simply starting the process of credit checks. When you really need that loan you want nothing innocent on your credit report than can flag you as a potential high risk and prevent you for getting that needed car loan or home loan.