Understanding your Credit Report
What is a credit report and why is it important to know about it? Well, if you earn your income in cash and only spend pure cash, you would not need to worry about it. But it is not the case of most of us since we do lease or finance our cars, apply for a mortgage when we want to purchase a house and even use a credit card for most of our daily expenses. Hence it is important to know what a Credit Report is and what you need to do to keep it clean.
A credit report is simply a history of your financial obligations and payment habits. It is created when you start borrowing money or apply for credit and you will build it over time. It is the primary tool that banks and other financial institutions or creditors use to grant you credit.
All companies that lend or collect money or issue credit cards send reports to credit bureaus, such as Transunion or Equifax to name the top two, on a regular basis. Their communication includes the credit accounts you have opened, loans, mortgages, and information about leasing. It also shows when you opened those accounts or applied for them, the limit, the balance of payments, timelines of payments and if you have ever gone over your limit.
Every time that you apply for a loan, mortgage or credit card, you will need to allow that organization to check your credit history. This credit report provides them with a summary of the information about all different kinds of accounts you have which includes your revolving accounts like credit cards and lines of credit, Installment accounts lime mortgage and other loans, other accounts like cell phones and even collection accounts if any.
Your credit information is confidential and these organizations need your permission to access the report when evaluating your credit worthiness. However, it is important that you order your credit report from time to time (usually recommended once a year) to check for accuracy and if you need to contact the bureau for amendments and corrections.
When you receive your credit report it also includes a three-digit score. The credit score helps creditors decide to grant you the credit you are applying for. There are so many factors that affect your credit score including: Your track record for repaying your loans and credit card balance, How much money you currently owe on your credit accounts, How long your accounts have been open, The different types of credit you use or credit mix, How much credit you use compared to the amount of credit you have available, How often and how recently you have applied for credit.
TIPS TO REMEMBER
- Make sure you have a credit history: you may not have a score because you do not have a record of owing money and paying it back. One way to build a credit history is by using a credit card
- Always pay your bills on time
- Don’t go over 50% of the credit limit on your credit card
- Apply for credit in moderation
Information prepared by Saghar Darabnia.