What is a credit report, and how to build good credit?

Posted 17.05.2023

What is a credit report, and how to build good credit?

A credit report summarizes your past and current credit activities. To strengthen your financial well-being, it’s important to understand what a credit report is and how to build good credit.

To help you, this article explores what credit reports are, how they work, and how to improve your credit score.

Key takeaways

A credit report shows your credit history, including payment records, debts, credit accounts, and more.
Your credit score is a numerical value that suggests your creditworthiness to a lender.
There are three major credit bureaus — Equifax, Experian, and TransUnion.

What is a credit report?

In essence, your credit report records your entire financial history. This includes your past to current debts, credit cards, payment records, and more. For example, if you take out a car loan or pay your credit card balance late, these go to your report.

Credit bureaus collect and save your financial information from banks, lenders, and other financial institutions. In America, there are three major credit reporting agencies (CRAs) that do so — TransUnion, Experian, and Equifax.

How does a credit report work?

If you’re applying for credit or borrowing money, lenders review your credit report as part of the application process. This helps them evaluate your financial risk before deciding on your rates and terms. If you apply for rent, utility, or even cell phone services, landlords and service providers check your report, too.

For example, if you’re looking for an auto loan, lenders would assess your credit report. If your report suggests that you don’t have any problems managing your debts, it may be quite easier to get your loan approved. But if your credit report shows you often miss payments or default, they may offer you higher rates or decline your application.

Also, keep in mind that creditors aren’t required to report to any or all agencies. This can mean two things — you can have different credit reports and different credit scores. For instance, a credit check on your TransUnion report may not be on your Experian report. This can then affect your credit scores from these agencies.

What is on a credit report?

Generally, this document includes your:

Personal information. This section provides personal data, such as your name and other names used in your accounts, past and present addresses, and birth date. It also shows your Social Security number and phone number(s).
Credit accounts. In your credit summary, you can find a detailed record of the different types of accounts you have. These include credit cards and lines of credit, personal loans, mortgages, auto loans, etc. And for each, it specifies the dates the account was opened and closed, creditors, balance, loan amount, credit limits, and payment history.
Public records. The next section details your financial transactions, like bankruptcies, liens, foreclosures, and civil suits and judgments. In case you filed for bankruptcy, it wouldn’t permanently stay there.
Credit inquiries. You can also see individuals or companies that recently accessed your credit report.
- Hard inquiry: A hard inquiry or hard pull happens when financial institutions check your credit report. This can be from credit or loan applications, such as credit cards, insurance, mortgages, etc. Since hard inquiries show up on your report, they can temporarily cause a slight dip in your credit score.
- Soft inquiry: When you or companies check your credit report for prequalification or pre-approval, this is called a soft inquiry. Unlike a hard inquiry, it doesn’t impact your credit score.

How to get a credit report?

You can request a free credit report from each of the three major bureaus per year. But because of the pandemic and the financial restraints it carries, you can have a free copy each week until December 2023. To get your copy, you can visit AnnualCreditReport.com or call 1-877-322-8228.

After receiving your reports, make sure you review them for any mistakes or suspicious activities, like fraud and identity theft. If you spot errors, dispute and correct them as they have repercussions on your credit.

What is a credit score?

Your credit score is a number that lenders use to determine how risky you are as a borrower. It is a three-digit number that often varies from 300 to 850. The closer your score is to 850, the better.

A high credit score indicates that you are likely to repay a loan. As a result, you may qualify for lower interest rates and favorable terms. For example, you apply for a personal loan, and your credit score is 835. There’s a high chance that lenders may offer you their best products and flexible terms.

However, if your credit score is low, you may face higher interest rates. Taking the situation above, if your credit score is 430, you may find it harder to secure the loan. Because of your score, lenders may charge you higher interest or decline your loan.

Since each credit bureau calculates your credit score differently, you can have multiple credit scores. But generally, it’s based on your payment history, credit utilization, and credit applications.

What is a good credit score?

There are different scoring models and score ranges, so a good credit score can vary.

For example, FICO Scores may be divided like this:

Exceptional: 800-850
Very good: 740-799
Good: 670-739
Fair: 580-669
Poor: 300-579

Meanwhile, VantageScore breaks down the score range this way:

Excellent: 781-850
Good: 661-780
Fair: 601-660
Poor: 500-600
Very poor: 300-499

While the scoring ranges differ, ideally, aim for a credit score that lenders consider good.

How to build good credit?

If you become delinquent or miss any payments, the great news is you can still improve your credit score. Here are some of the things you can do to build good credit:

Pay your bills on time: Your payment history has the most significant impact on your credit scores. Make sure you don’t fall behind on payments to avoid damaging your score. To do this, you may track your bills or set up automatic payments.
Lower your credit utilization:If you have a credit card, avoid maxing out your credit limit. It’s a good practice to keep your balance under 30% of your limit because high outstanding balances can negatively affect your score. If you can, try to pay off your balance in full each month.
Avoid multiple credit applications: Since hard inquiries appear on your credit report, avoid making several applications over a short period. This can give banks and lenders the impression that you face financial difficulties. In turn, they may see you as a high-risk borrower.
Check your credit report: Monitor your credit report through soft inquiries, and ensure it’s free from errors. If there’s an error or suspicious activity, make sure you file a dispute to correct them.
Keep your old accounts open: Your credit score is also affected by the length of your credit history. Unless they come with very high fees, avoid closing old accounts even if you don’t use them. This can increase your credit age and make you more appealing to lenders.

Final thoughts

Whether you’re applying for a credit or a loan, it’s a great idea to understand your credit report. This can help you know what you need to work on to improve your finances, build positive credit, and boost your application.

Carla Soto

Carla is a skilled copywriter at BestFind with a background in marketing and communications. She specializes in reviewing personal loan and finance products to help readers navigate the complex world of personal finance.