What Is a Credit Report? How Your Financial History Impacts Future Borrowing

Picture this: Your application for a loan or credit card is flat-out rejected because the lender looked at your credit report. I know rejections hurt — I’ve had my fair share. But at least it’s not personal. I mean, it’s not like a rejected marriage proposal or being picked last in gym class. If anything, it’s totally objective and based on numbers.

Your credit report is a detailed account of your history of borrowing money. It contains data gathered from creditors, lenders, and other financial organizations. If you’re interested in learning more, keep reading. 

Your credit report is a detailed account of your history of borrowing money.

I’ll share everything you should know about your credit report and how you can get lenders to say “yes” to your application. 

Credit reports are based on information gathered by credit bureaus. Your credit report is like a cheat sheet for decision-makers when they offer you a credit card or loan or accept your application for an apartment.

The Information in Your Credit Reports

I compare a credit report to a financial diary. Your credit report contains your personal information, credit account information, public records, and any inquiries made about your financial history.

Each section tells a story, and believe me, you want yours to be a page-turner for all the right reasons.

The Role of Credit Bureaus

The credit bureaus are the gatekeepers of your financial history. In the United States, there are three credit-reporting giants: Equifax, Experian, and TransUnion. These agencies gather most of your credit information, piecing together millions of pieces of data that lenders use to decide whether you’re creditworthy.

These bureaus get periodic updates on your credit activity from lenders, recording details about your payment history, limits, and outstanding balances. They use this information to compile reports of your financial behavior.

As somewhat of a civil libertarian, I’m not crazy about the Big Brother roles these bureaus play in our lives. However, creditors depend on the details from the bureaus to back up the decisions they make about lending money and issuing credit cards.

Now, the interesting part is that lenders, credit bureaus, and credit score models are interdependent. To put it another way, lenders depend on factual information from credit bureaus, which credit score models use to calculate your credit scores, to establish your borrowing risk. 

Conversely, those credit bureaus count on lending institutions to send them data in a timely manner. I’m not even hinting that it is a perfect system, but it does try to keep your credit reports as accurate as possible. You’re probably not surprised to learn that they don’t always succeed.

A credit report contains multiple sections, all designed to provide the reader with a variety of information about your credit history. 

Personal Information

First things first: your name, address, Social Security number, and date of birth. It’s the “About Me” in a bio; it simply validates your existence. Yet the thing is, if any of that information is incorrect, it can result in big problems. 

Believe me, you really don’t want other folk’s financial drama blended into your own. The reports also list your previous addresses and job histories — information that may not sound like much but is quite important for lenders when they check on your stability.

Credit Accounts

Now, let’s get to the juicy part: your credit accounts, or, as they are also known, trade lines. This is your financial life unfolding right in front of your eyes. I think of it as a credit journey, from credit cards and car loans to mortgages and personal loans.

Each is listed with the date when it was opened, your credit limit or loan amount, your current balance, and, of course, your payment history. 

I have relatives who’ve been down the road of missed payments, and it’s rough — it’s definitely not a place where any of you want to check out the scenery. Payment history is actually the backbone of the credit report itself. It tells if you are the kind of person who pays their bills on time or if you’ve had a few too many slip-ups.

Part of the story is your credit utilization ratio (CUR) — what share of your available credit you’re using.

For example, suppose you have a $5,000 limit on your card — not a bad number! If you carry a balance of $3,000, your CUR is 60% — not a good number! You should keep it below 30% so lenders don’t think you’re addicted to credit or overextended.

Public Records and Collections

This is the section where it’s almost like airing out your dirty closet: public records and collections.

If you’ve ever had a debt sent to collections, filed for bankruptcy, or dealt with a tax lien or foreclosure, it’s all here. All this falls into the category of things that may seriously damage your financial reputation. I have had friends who have gone through bankruptcy, and believe me, it’s a black mark that does not go away easily.

In fact, bankruptcies can stay on your file for up to 10 years. That is a really long shadow hanging over your financial history. Collection accounts are not a walk in the park, either. They indicate that your debt was so delinquent that it had to be transferred to a collection agency. Once it’s on your record, it will take seven years to shake.

Credit Inquiries

Now let’s get into credit inquiries, those occasions when someone — usually a creditor — takes a peek at your financial life. Every time you apply for credit — a loan, credit card, or even a new cellphone plan — it results in a hard inquiry on your credit report. 

Too many hard inquiries in a short period? That could make you look a little too desperate for credit, not a good thing. It’s like going to a dating hookup. If you send flowers by the dozen on a daily basis to each new person you meet, you’re coming across as a bit desperate.

Then there are soft inquiries. These result, for example, when you check your own credit or when a business does a background check. Softies won’t lower your credit score, and only you can see them.

Hard inquiries, on the other hand, influence your credit score, so it is best to keep these scarce — I recommend you wait six months between credit applications.

Alright, we’ve talked about what’s in your credit reports. But how do you get your hands on them? then, what do you do with them once you get them?

How to Access Your Credit Report

The good news is, in the United States, you can get your own free credit reports each week from the three major credit bureaus — Equifax, Experian, and TransUnion — under new rules established in April 2022. The free weekly credit reporting service helps you keep on top of your credit health.

Here’s the deal: While the official credit report is chockablock with important information, it does not include your credit score. But that’s OK because many banks and most credit card companies give you free online access to your score from FICO or VantageScore. Scores provide you with an executive summary of what appears on your credit report. 

Feel a little uncomfortable having your financial life reduced to a single number? I don’t blame you, but that’s the way the system works.

If you are the kind of person who needs more reassurance, you may want to pay for a credit monitoring service. These services usually run between $10 and $30 a month and can alert you to suspicious activity on your credit report. 

Plenty of people I know swear by these services,  especially if they have been burned by identity theft in the past. Heck, I use one myself.

Understanding Your Report

Once you have your credit report in hand, it’s time to put on your detective hat. You can dredge through the details, beginning with the section on personal information. Look for inaccuracies. Even a wrong address or a misspelled name could be a clue to a mistake or identity theft.

Proceed next to the credit accounts section. Here, you get the positive or embarrassing details concerning your credit activities. Scrutinize all accounts to make sure that the information is correct. 

Are the balances right? Have you actually made all the payments as indicated? Do some accounts look strange, or you don’t remember having them? If anything looks off, it’s time to dig deeper and, if need be, dispute the errors with the credit bureau.

You should also review the section with your public records and collections. If, by chance, you find negative marks that don’t belong there, such as a filing of bankruptcy when you did not or a collection account not owned by you, then it’s important to fix these issues pronto. Negative items can destroy your credit points. I strongly advise you to take the time to correct the mistakes.

Last, check out the portion for inquiries. Hard inquiries you did not authorize may be a red flag for fraud, and you will want to take action immediately. A creditor must be able to prove you gave permission for a hard inquiry; if it can’t, the bureau must deep-six it.

Disputing Errors

People make errors every day. Unfortunately, when mistakes appear on your credit reports, they can wreak havoc. The good news is that you can dispute mistakes. 

The most common inaccuracies are wrong personal information, stale account statuses, and accounts that have nothing to do with you at all. That’s why it is important to correct them on the spot before they ruin your credit score. 

You dispute errors directly with the credit bureaus. Each bureau has an online dispute process, but there are options to mail or call in disputes. Make sure you send a detailed description when you dispute errors, explaining the problem and providing any backup documentation. 

The investigation process requires the credit bureau to respond to your dispute within 30 days.

You can lodge disputes yourself or hire a credit repair agency to do the job for you. 

Most agencies operate on a monthly charge basis, ranging from $70–$150, and perform the heavy lifting, such as identifying errors, filing disputes, and following up with bureaus. Be warned, though, that they are unable to remove the correct items in your file, only the incorrect ones.

Don’t go overboard filing disputes just to see which ones stick because credit bureaus can ignore frivolous disputes. In other words, make sure you have the goods to back up your challenges so that the bureaus take you seriously. 

According to the Fair Credit Reporting Act, credit bureaus have to resolve disputes within 30 days. The timeline can actually be extended if new information comes to light. Be sure to track your status and ensure your corrections are timely.

Your credit reports are not some dry record of your financial past. Rather, they bear directly on your financial future. They will affect whether you get car loans, mortgages, student loans, credit cards — you name it. They may even influence who wants to hire you or rent an apartment to you. I’ll explain how your credit reports affect your life and why you need to keep them in good standing.

Credit Score Calculation

Your credit score is a number representing your creditworthiness. Most lenders use your credit score along with your credit reports to decide whether you pass muster. 

There are five factors that make up FICO scores, each having a particular weight. You need to understand these factors if you want to improve your credit standing.

If you take anything from this, let it be that your payment history holds the most weight. It includes your repayment history, including whether you repaid on time or defaulted. 

The next most important factor is the amount owed. This category includes your credit utilization ratio (discussed earlier), which ideally should be as close to 1% as possible. Next comes the credit history length, specifying the period of open and active credit accounts. Older is better; it shows you have a handle on what you’re doing, credit-wise.

Finally, the new credit and credit mix each equal 10% of your score. New credit focuses on recent hard inquiries and new accounts. Credit mix deals with the number and types of credit accounts you have. A broad mix is good, as it speaks to your financial skills.

Knowing these factors and how they are weighted can help you manage your finances through creditworthy behavior. Checking credit reports on a regular basis and disputing any negative items can improve your credit score over time.

Loan and Credit Card Approvals

Creditors usually check at least one of your credit reports before issuing you a loan or credit card. A good credit report, with the characteristics of an on-time payment history and low utilization, shows that you are a responsible borrower. Therefore, you will probably get the credit you apply for. 

On the other hand, a bad credit report with missed payments, high card utilization, and too many hard inquiries may raise flags. It pains me to say it, but you may get saddled with more costly interest rates and less favorable terms — or perhaps be slapped with a flat denial.

Debt-to-Income Ratio

Lenders use your debt-to-income ratio to evaluate applications for loans and credit cards. Your DTI measures the percent of gross monthly income that goes toward paying debts. It is calculated as the total monthly debt payments divided by the gross income per month. 

A low DTI ratio speaks to good financial health, whereas a number above average means you may have bitten off more debt than you can chew. A very high DTI suggests that you could be floundering as you try to keep your debt under control. Think of juggling too many balls at once. Sooner or later, one will fall. 

A lender will see a high DTI as a huge red flag because you may have a problem repaying new debt. That is why many lenders set specific DTI thresholds as part of their own approval processes. For example, most of the mortgage lenders require an overall DTI of less than 36 percent. 

Improving your DTI ratio is not just about repaying standing debts. Rather, it refers to exercising caution in not acquiring excessive debt in relation to your income. It can also be tipped in your favor by earning more money from another job with higher pay or from other sources. 

A lower DTI ratio has an obvious benefit in that it increases your loan approval chances with better terms and lower interest rates. Think of it as providing a financial speed limit warning you not to overstretch your debt.

So now, let’s pull back a little and have a look at why a good credit report really matters. Imagine that your credit report is your golden ticket to financial opportunity.

A good, strong credit report will open doors for the best loan and credit card options, higher credit limits, and the lowest interest rates. 

But here’s the flip side: a bad credit report can slam the doors of opportunity shut. Sky-high interest rates, low credit limits, or flat-out denials are common results when your credit report contains late payments, high debt levels, or earlier bankruptcies. You’re kind of stuck high in the stadium’s corner with only a partial view — you’re in, but this is not the seat you had in mind. 

Employment and Housing

Good credit is important well beyond loans. Many employers and landlords pull credit reports because they want to know whether you’re a deadbeat before considering your application. They want to see if you have a history of on-time payments and a reasonable level of debt. It all boils down to how financially responsible and reliable you’ve been.

Good credit, prompt repayment, and low debt levels all create an appealing picture in the eyes of potential employers and landlords. A weak credit report may cause a prospective employer to toss your résumé into the trash. It motivates landlords to increase security deposits, request cosigners, or even deny your rental application. 

Clearly, maintaining a good credit report is essential for a comfortable lifestyle. I’ve lived well, and I’ve lived on a shoestring. That’s why I urge you to take your credit reports seriously; trying to make it from week to week is not fun.

By now, of course, it should be quite clear that your credit history report can influence the basic stuff in life. It influences the kind of loans you can get, the jobs you’ll be offered, and the apartments you can rent.

A good credit report tends to smooth out the rough edges of life – it did for me — and enables you to look forward to the future. A bad credit report intensifies life’s troubles. Debt becomes more costly when you have to pay high interest rates. Many credit cards for poor credit are just terrible, with high costs and low credit limits. 

That’s why keeping a clean and updated credit report is so important. It is well worth the time and effort, considering it could potentially save you thousands of dollars in interest over your lifetime.