How to (Finally) Understand Your Credit Report
From Target to Home Depot to Sony, major data breaches have become an unfortunate, yet common, occurrence. There's a good chance your personal financial information has ended up in the hands of a criminal at least once, if not several times.
Yet, nothing has come close to the most recent breach at Equifax, one of the three major credit reporting agencies. It's estimated that an unprecedented 145.5 million Americans had their names, addresses, Social Security numbers, account numbers and other personal information exposed. Perhaps the only fact more shocking than this is that only 26 percent of U.S. adults checked their credit within the two weeks following the breach, according to a survey by CreditCards.com.
Worse, just over half of respondents claimed they heard "a lot" about the breach but didn't check their credit reports or scores. But why? Although there are a number of reasons, it might come down to the fact that many Americans simply don't understand how to navigate their credit reports.
What Is a Credit Report, Exactly?
One of the most confusing things about credit is understanding the difference between your credit report and credit score.
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"Your credit score is like your IQ," says Mike Sullivan, personal finance consultant at Take Charge America, a national nonprofit credit counseling and debt management agency. He explains that it's a three-digit number that summarizes many different factors to give you a quick glimpse of your overall credit status.
"Just as your IQ can't tell you if you should be a physician or a musician, your credit score can't tell you what financial problems you have or what you should do to correct any problems," says Sullivan. To do that, you need to check your credit report.
"Your credit report is a financial biography," he notes. It details your personal and financial information, such as addresses where you've lived, bank accounts, loans, bankruptcy filings and tax liens.
Further, you have more than one credit report and dozens of credit scores. The reports you should pay attention to are the three provided by the major credit bureaus: Experian, Equifax and TransUnion. Each collects and analyzes your information independently, so it's possible to find different information on each.
"Creditors, insurers, prospective employers, lease agents and others will read and interpret your report. ... It's important to know what they are seeing and to be able to edit the report by keeping entries clean and correct," advises Sullivan.
Why Checking Your Credit Reports Is Important
As Sullivan notes, your credit report informs your credit score. If there's a negative entry or an error on one of your reports, it could, in turn, lower your credit score. That can have significant consequences if you're:
Borrowing money. Whether you are approved for a credit card or loan is dependent on the health of your credit. If you are approved, better credit will allow you to take advantage of lower interest rates. In other words, a clean credit report will result in a higher score, allowing you to borrow money for less.
Renting an apartment. It's common for landlords to run the credit of apartment applicants before deciding on a tenant. "Landlords check credit to get a handle on whether you will pay the rent on time," says Frederic Huynh, VP of credit risk with Freedom Financial Asset Management, a company that provides financial services, products and solutions, and former lead data scientist for FICO, the company that produces the FICO credit score. If your credit is in bad shape, you might have trouble finding an affordable place to rent since you'll likely have to pay a higher deposit, or getting approved to rent the place at all.
Leasing a car. According to Huynh, a fair or poor credit score will usually require a higher down payment since the lender will want high-risk applicants to have "more skin in the game." Also, many auto finance companies typically require you to have a good or better credit score to lease a vehicle.
Qualifying for low auto insurance rates. Finally, Huynh notes that car insurers in most states review credit files to help predict the odds that someone will file a claim. "Credit scores can actually have more of an impact on premium price than other factors," he says.
Applying for a job. Especially for positions that require access to large amounts of money or sensitive information, employers will run credit checks on prospective employees. "The idea is that if a person is struggling financially, he is more likely to steal from the employer to try to fill the gap in his finances," says Huynh. Employers might also assume that the poor decision-making that led to a low credit score could be a problem at work, too.
How to Read Your Credit Report
It's possible to view information from your credit reports for free via websites such as Credit Karma. However, the only site federally authorized to provide all three official credit reports at no cost is AnnualCreditReport.com. You can also call 877-322-8228. Each report is accessible for free once a year, so it's a good idea to request one every few months rather than all three at once.
Each report looks a bit different, but all contain the same types of information. When reviewing your credit report, take a look at each of the following sections and make sure it's accurate.
1. Personal information
The first section of a credit report contains personal information such as your name and any aliases, current and previous addresses, date of birth, Social Security number and other personally identifying information.
It's important to review this section for accuracy. If you share the same name with another person, for example, it's possible you'll end up with mixed accounts -- that person's credit information could be listed on your report and vice versa.
2. Accounts in good standing
The next part you should review is the section that details all your credit accounts that are considered to be in good standing.
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This section might be broken up into revolving accounts, which includes credit cards or home equity lines of credit; installment accounts, like mortgages or student loans; and "other" accounts, which might include child support obligations or rental agreements. Each entry will detail the type of account, account number, lender, available credit, amount owed, whether the account is open or closed, and other status information. You should verify that each account does, in fact, belong to you and that the payment history is accurate.
3. Negative items
Next, your credit report will note any accounts that are past due or that have been sent to collections, as well as other negative items. This section also contains information detailed in public financial records, such as bankruptcy judgments, liens and overdue child support, says Huynh. Review it for accuracy. Also, if you experienced a major financial setback such as a bankruptcy or foreclosure, it will likely remain on your report for seven to 10 years.
4. Consumer statements
If you disagree with any of the information contained in the accounts section or simply want to give your side of the story, you can include a 100-word statement in your credit report. For example, you might want to explain a recent bankruptcy to prospective employers or alert mortgage lenders to an error in dispute. Consumer statements are voluntary and don't have any impact on your credit score.
Each credit bureau has its own process for adding a statement to your credit report. If you'd like to add one, follow the instructions on each credit bureau's website. But remember: You must contact all three credit bureaus if you want your statement on all three reports.
5. Inquiries
The last part of your credit report will list the entities that have requested a copy of your credit report, such as credit card companies and lenders. Make sure you recognize all the businesses listed and request the contact information for any company you don't recall applying for credit from.
How to Protect Yourself Against Credit Report Errors and Fraud
In the wake of its recent breach, Equifax created a website where consumers can check whether their personal data might have been compromised. You can visit www.equifaxsecurity2017.com to check for yourself, though it should be noted that there has been some criticism of its security and accuracy, The Washington Post reports.
To protect yourself from current or future data breaches, it's best to take a few extra precautions:
Check your credit reports regularly. You should be requesting and reviewing all three credit reports every year, regardless of whether you believe your information has been compromised. Catching identity theft early is the best way to minimize the damage.
Dispute errors. If you do find a mistake or potential fraud, you can dispute the entry directly with the credit bureau that's reporting the information. The best way to do so is by mail. Send a letter to the credit bureau detailing which items need to be corrected, along with copies of any supporting documents. It might be helpful to enclose a copy of your report, with the item in question circled. Request to have that entry corrected or removed, and send your request via certified mail with return receipt requested so you have a paper trail.
The credit bureau then has 30 days to investigate your claim. Once the investigation is complete, the credit bureau is required to give you a free copy of your credit report if any changes were made, as well as provide the contact information for the organization that originally reported that entry.
Freeze your credit. If you're worried about fraud, the best thing to do is put a freeze on your credit. This means that your credit reports are barred from access, preventing anyone from opening an account in your name.
There are a few drawbacks to freezing your credit. You have to contact each of the credit bureaus individually to request a freeze. Plus, freezing your credit with each bureau costs around $3 to $10. It also costs money to unfreeze your credit, which means the fees can really add up. Additionally, a credit freeze won't protect you from credit card fraud if your card information ends up in the wrong hands.
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Still, the drawbacks to freezing your credit are far outweighed by the benefits of avoiding identity theft.
Set up a fraud alert. If you don't want to deal with the trouble or cost of freezing your credit, you can set up a less-restrictive fraud alert instead. If you are not currently a victim of fraud but worry you are at risk, you can place a fraud alert that lasts 90 days. If you're on active duty with the military, your fraud alert will stay in place for a year. When you place a fraud alert on your credit, lenders and other creditors are required to verify your identity before an account can be opened in your name. Once you place a fraud alert with one of the credit bureaus, it is required to notify the other two as well. You will be entitled to a free copy of your credit report from all three bureaus every time an alert is set up or renewed, which won't count against the one free report you're entitled to annually. The best part: Fraud alerts are free to set up and can be renewed or canceled online.
Navigating your credit report can seem confusing if you don't know what to look for. But with the prevalence of data breaches and fraud today, you can't afford to ignore your reports. By regularly requesting and reviewing your credit reports, you'll become familiar with the process and easily identify issues before they turn into full-blown disasters.
Casey Bond is a seasoned personal finance writer and editor. Her work has appeared in a number of major national publications including U.S. News & World Report, Yahoo Finance, MSN, The Huffington Post, Business Insider, Forbes and others. Follow her on Twitter @CaseyLynnBond.
