Reading a credit report may seem intimidating, but breaking down the information is easier than you think. When you grasp how to read a credit report correctly, you will have a better picture of your total finances. It also makes it easier to discover any flaws or inconsistencies that could be unfairly lowering your score.

Your credit report is essentially a complete record of your credit history that lenders and other parties use to calculate your credit score and make other financial choices.

Your credit score is an important sign of the quality of your credit history, and it can influence your ability to qualify for affordable financing and even low insurance rates. To help you enhance your creditworthiness and general financial well-being, here’s a comprehensive guide to credit ratings.

What Is a Credit Score?

A credit score is a three-digit number indicating your creditworthiness. FICO scores range between 300 and 850. The higher your score, the more likely you are to get approved for loans and at better rates.

A credit score is calculated using information from your credit history, such as the number of accounts, total debt, repayment history, and other criteria. Lenders use credit ratings to determine your creditworthiness, or the possibility that you will repay debts on time.

There are three major credit bureaus in the United States: Equifax, Experian, and Transunion. This triumvirate controls the market for gathering, analyzing, and disbursing consumer information in the credit markets.

The credit score model was developed by Fair Isaac Corp., also known as FICO, and is utilized by financial institutions. Other credit scoring systems exist, but the FICO Score is by far the most widely utilized.

Your FICO credit score is calculated based on a number of factors, including your repayment history, debt utilization, credit history length, credit mix, and any new accounts opened. Lenders assess your credit score to determine whether to approve you for goods such as mortgages, personal loans, and credit cards, as well as the interest rate you will pay.

A credit score has a huge impact on your financial life. It influences a lender’s choice to provide you with credit. Lenders are more likely to approve loans if you have a better credit score, and they are more likely to reject loan applications if you have a lower credit score. A higher credit score can also result in lower interest rates, which can save you money over time.

In contrast, a credit score of 700 or higher is often regarded favorably by lenders and may result in a cheaper interest rate. Scores over 800 are considered outstanding. Each creditor has its own credit score range and lending requirements. Here are the general ranges for how credit scores are categorized.

• Excellent: 800–850
• Very Good: 740–799
• Good: 670–739
• Fair: 580–669
• Poor: 300–579

How to Read Your Credit Report

You can order one free copy of your credit report each year from the three main reporting bureaus: Equifax, Experian and TransUnion. You can get all three reports at once for free by ordering directly from AnnualCreditReport.com.

While there may be slight variances in how your credit reports are presented, all three bureaus should give accurate information in these five categories.

Personal information

Your personal information will include your name (including former names and any aliases), your Social Security number, and birth date. Your report will include current and previous addresses and contact information like phone numbers and email addresses.

Ensure that all of the personal information on your credit report is correct. Every aspect of your credit report must be about you: not your dependents, your ex spouse, and, most importantly, not a stranger with the same name.

A misspelled name (even just an inaccurate middle initial), a location you don’t recognize, an incorrect digit in the Social Security Number, or a phone number that isn’t yours are all signs that your report has been mixed up with someone else’s.

Employer history

Your credit report will include current and previous employers. Employer history is sometimes included in the personal information section.

Your employment history has no bearing on your credit score because it is unrelated to your credit or debt. It is placed on your credit report to authenticate your identification, so any erroneous information, such as firm names you do not know or employers you have never worked for, is a red flag.

Credit history

Your credit history is the largest and most crucial element of your credit report. Your FICO credit score is calculated using a variety of factors, including amounts owed (30%), length of credit history (15%), new credit (10%), and credit mix (10%). However, the majority of your credit score is calculated based on your payment history (35%).

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Because your credit history contains the most crucial pieces of information used to calculate your credit score, you must spend time carefully verifying for inaccuracies in this portion of the report.

The credit history on your credit report will include the following components:

• Current and closed accounts from the past seven to 10 years. This includes individual accounts, joint accounts and ones where you’re listed as an authorized user. You’ll see revolving credit, like credit cards and home equity lines of credit, as well as installment loans, like student loans, auto loans, or mortgages.
• Payment history. This is a record of all your payments, particularly whether or not minimum payments were made on time. Negative accounts will show any payments that are missed. Past-due amounts may be reported as 30, 60, 90, 120 or 150 days late.
• Current balances. This includes the current balance when the issuer reported to the bureau and the highest ever balance on the account.
• Names of creditors and lenders. Every account listed will include the name of the lender or creditor and the date when it was opened. Credit reports don’t include specific information about individual purchases.
• Credit limits or loan amounts. The current credit limit for revolving accounts and the original loan amount for any fixed installment accounts.
• Account opening and/or closing dates
• Account status. You may see accounts listed as open, closed, paid, refinanced, transferred or foreclosed. Some accounts may be marked as charged off, which is when a debt is between 90 and 180 days past due and considered delinquent.

Even if you close an account or pay off a loan, the information will remain on your credit history for a length of time. Negative credit information, such as late payments, overdue loans, and charged-off loans and accounts, can remain on your credit report for up to seven years. Credit information for canceled accounts in good standing will be removed from your credit report after ten years.

Examine your credit history to ensure that the account number, name, balance amount, payment history, due date, and payment status are all right.

Check to ensure that the account’s current credit limits or original loan amounts are accurate. If the credit limit reported is smaller than the one you actually have, it may reduce your credit utilization, which affects your credit score.

Public records

Your report will incorporate publicly available debt-related records. These could involve bankruptcies, foreclosures, or repossessions. Public records remain on your report for seven years, with one exception: Chapter 7 bankruptcy stays on your report for ten years.

All of them can lower your credit score since they demonstrate a pattern of major delinquencies. This section excludes arrests, litigation, divorces, and unrelated legal violations such as speeding tickets.

If your credit report contains a public record, you may be required to provide a credit report explanation to lenders to explain why a negative item appears on your report.

Any public record on your credit report must include your name, address, Social Security number, or date of birth, and it must be validated by a courtroom visit at least once every 90 days. Make sure the public record includes your correct name, date of birth, address, and personal information.

Tax liens no longer have an impact on your credit, so you should not see property tax liens, income tax liens, federal and state tax liens, or civil judgments on your report. If you see a tax lien on your credit record, you must challenge the error with the credit bureaus.

Credit Inquiries

A credit inquiry is a record on your credit report that shows who accessed your information and when. There are two types of credit inquiries:

• Soft inquiries happen when you check your own credit. Soft inquiries, also known as soft credit checks, also happen when current creditors check your account or when other companies plan to send pre-approved offers.
• Hard inquiries are more serious. These appear when lenders check your credit when you apply for new credit cards, credit card limit increases, loans or mortgages. Hard inquiries can also happen when a collection agency is trying to locate you.

While soft inquiries do not influence your credit score, each hard inquiry can temporarily lower it by a few points. Hard queries are important since they can signify increasing risk to lenders, who wonder why you want or need additional credit.

If you discover an inquiry that you do not recognize, it could be a sign of identity theft. However, an unusual credit query on your report may be the result of numerous potential lenders pulling your record after you apply for a loan or mortgage. However, issuers normally treat comparable closely timed queries as a single inquiry if they occur within a specific time limit (usually 45 days or less).

How to Improve Your Credit Score

While there are certain broad actions you may take to establish and maintain good credit, many of the methods for improving your credit score will be unique to your situation and credit history.

Check your Experian, Equifax, and TransUnion credit reports (available through AnnualCreditReport.com) to identify areas that require attention. The information you find will help you decide which steps to take first.

With that said, here are a few best practices to get you started.

Pay Your Bills on Time

If you’ve always paid your bills on time, keep doing so. However, if you have some past-due payments, get caught up as quickly as possible and make it a priority to pay on time going forward.

Pay Down Credit Card Balances

While some financial experts recommend keeping your credit utilization rate below 30%, there’s no specific threshold at which point your utilization rate starts hurting your credit score. In fact, the lower your rate, the better.

If you carry a balance from month to month on one or more of your credit cards, make it a goal to pay off your balances and start paying your bills in full each month. If your utilization rate is still high despite paying your statement balance in full every month, consider making multiple payments throughout the month or increasing your available credit by requesting a credit line increase or applying for another credit card.

Avoid Frequent Credit Applications

Applying for credit regularly not only results in multiple hard inquiries but it can also bring down the average age of your credit accounts. As a result, it’s a good idea to only apply for credit when you absolutely need to.

Dispute Inaccurate Credit Information

As you review your credit reports, look for information that may not be accurate. Fraudulent and incorrect credit report information could potentially harm your credit score.

If you find something, you have the right to file a dispute with the credit bureaus. The credit reporting agencies will investigate your dispute, and if they update or remove the information, it could potentially help increase your score.

Use Experian Boost

Experian Boost allows you to add positive payment history to your Experian credit report that doesn’t traditionally get reported. This includes eligible rent payments, utility bills and even some streaming subscriptions.

When you sign up, you can connect the bank and credit card accounts you use to pay your bills, then choose and verify the positive payment history you want to add to your Experian file. There’s no guarantee that this will increase your credit score, but if it does, you’ll see the results instantly.

Finally

Your credit score is a number that can significantly affect your financial situation. If you have a strong credit score, you are more likely to get approved for loans and receive better conditions that will save you money. Learning about your credit score and how it is calculated can help you improve it.