How Credit Reports Work – Your Financial Report Card

What exactly is a credit report? How can it, as they say, drastically affect your life? Have you ever applied for credit and been turned down, but didn’t understand why? Then you absolutely need to know how credit reports work, and how important they are to your daily life.

Our mission here is to give you the information you need to make wise credit decisions. Consider this your credit school. We want you to learn. We want you to become educated in this important field. Do your homework – and get a good grade. Let’s move to Lesson 1.

Lesson 1: Why credit reports were created

First, for some background, let’s look at some current credit statistics:

Fact: Today’s consumer has a total of 11 credit obligations on record at a credit bureau. Of these 11, 7 are likely to be credit cards and 4 are likely to be installment loans.
Fact: 48% of credit card holders carry a balance of less than $1,000. About 10% have total card balances more than $10,000. 54% of consumers carry less than $5,000 of debt, but nearly 30% carry more than $10,000 of non-mortgage-related debt.
Fact: The typical consumer has access to $12,900 on all credit cards combined.
Fact: 1 out of 5 consumers who recently applied for credit had credit histories of 20 years or longer.

Get the message here? Consumer credit is at an all-time high. But so is credit card fraud. Check this out:

Fact: Losses to online fraud at North American retailers has dropped from 3.6% in 2000 to 1.7% in 2003.
Fact: There were 9.9 million victims of identity theft in 2002.

All these facts are reasons why credit reports were created. Certainly, in the early days of credit bureaus, credit reports were primarily exchanged between credit lenders – for their protection. And today, nothing’s changed – but now the protection goes both ways, for the creditor and the consumer. Certainly, online fraud numbers have decreased, but that’s because credit reports are serving their purpose.

Lesson 2: Credit reports provide protection

With the amount of credit cards out there, and the number of sales that are credit-related, protection is a major issue. That’s one of the purposes of credit reports – to provide protection. It’s recommended that you obtain a copy of your credit report every 3-6 months. What you see in that report will tell you if you’re in jeopardy of becoming a victim of credit fraud.

Your credit report is actually a history of your credit activity. Here’s what you should expect to see in your credit report:

Basic information, such as your name and any name variations used, your current and previous addresses, telephone number, Social Security (Social Insurance) Number, year and month of birth, and employment information.
Regular reports about your account from companies who’ve granted you credit.
Any late payments to those whom you owe money such as utilities, hospitals, landlords, credit cards, auto loans, mortgages, etc.
If you overdraw your bank account.
Any delinquent child support payments.
Any criminal convictions.
Any bankruptcies.
Any application for a job with a salary of more than $75,000.
Any application for more than $150,000 worth of credit or life insurance.
Any lawsuit or judgment against you.

That’s a whole lot of information! So you can see that your life isn’t exactly private. But, if the information on your credit report is accurate, then you have nothing to worry about.

The other factor in protection is, if you obtain a copy every 3-6 months, it may serve as a reminder of your spending habits. It may wake you up to the fact that you’re reaching your credit limits. In that way, you’ll be protected from getting too far in the hole. So use your credit report to your advantage.

Lesson 3: Who can access your credit report?

It’s quite staggering how many people have access to your credit report. Anyone with a “legitimate business need” can gain that access. That includes:

Those considering granting you credit
Landlords
Insurance companies
Employers and potential employers, if they have your consent
Companies with which you have a credit account, to monitor your account
Those considering your application for a government license or benefit if the agency is required to consider your financial status
A child support enforcement agency
Any government agency, but only to get your name, current and previous addresses, and current and previous employers

That’s a lot of people who can see your personal files. That’s why it’s so important to keep an eye on your credit report regularly.

Lesson 4: Errors in your credit report

Errors can happen in your credit report. With the vast amount of information going in and out of the credit bureau there are bound to be duplicate names, or very similar names. And since the information passes through human hands, mistakes can happen. The July 2000 issue of Consumer Reports quoted a study where more than 50% of the credit reports checked contained errors. You wouldn’t expect that number to be so high but, as we said, mistakes do happen. That’s why it’s so important that you regularly check your credit report.

Another reason for errors may be that your identity may have been stolen. Look back at the statistics above: 9.9 million identities stolen! That’s more than enough reason to know what’s in your credit files.

But you have recourse if you find errors. The law gives you the right to request a copy of your credit report (sometimes for a minimal charge). If you find what you believe to be errors, then there’s a process you can follow to correct or, at least, dispute what you find there. The credit bureau must make a note on your credit report that you’re disputing something, along with your reasons for that dispute. The downside to this is that the credit bureau won’t make any changes unless they’re given new information from your creditor. So your dispute will be with the creditor. This can take time and effort – but it’ll be worth it. A blemish on your credit history can affect your daily life – more than you’d think.

Lesson 5: Regularly get a copy of your credit report!

Now you have the information you need regarding credit reports. Now you know why it’s imperative that you regularly request a copy of your credit report. This is your financial report card. This report card is perused and examined by many people and companies throughout your daily life. Now you know why it’s so important you do your homework. And your homework is to request a copy of your credit report. So do your homework – and you’ll get a good financial grade!

About The Author

Gareth Marples is an experienced freelance writer providing valuable tips and advice for consumers purchasing free credit reports, car loan applications and home insurance quotes. His numerous articles offer moneysaving tips and valuable insight on typically confusing topics.

This article on "How Credit Reports Work" reprinted with permission.