What is a Credit Report and Why Do I Need to Understand It?
You have a credit card — maybe your first. Once you begin establishing credit, understanding your credit report is the next step to ensure you are in good standing in terms of your credit usage. Why do you need good credit? Initiating and building credit helps put you in a good position when you are ready to apply for an auto loan or even when being considered for an apartment. It also affects your credit score, which is used by lenders, and sometimes landlords, to determine your likelihood to repay loans, credit cards and/or rent.
Credit Report vs. Credit Score
A credit report is a statement with information about your credit activity and current credit situation, including loan payment history and the status of your credit accounts (either delinquent or up-to-date). It is good practice to obtain a copy of your credit report at least once a year. You can get a free copy from each of the three credit reporting bureaus — Experian, Equifax and TransUnion — each year through annualcreditreport.com. Regularly reviewing your credit report can help you identify factors that might be lowering your credit score and help you identify fraud.
A credit score is a three-digit number calculated from information in your credit report. The higher the credit score (up to 850), the more likely lenders will be willing to loan you money, approve you for a credit card and other lending products at more favorable interest rates. Although your credit score is not listed on your credit report, you may be able to get your credit score free from your financial institution or through online sites like NerdWallet and Mint.
Understanding Credit Reports
There are three main parts of a credit report:
• Identity information: includes addresses, Social Security numbers, and names associated with you.
• Public records: includes judgements or liens that have been made against you.
• Credit items: includes all credit accounts that have been opened in your name and payment histories.
Payment history detailed in your credit report has the single biggest influence on your credit score. If you are past due on any accounts, bring them current as soon as you can. Your credit use also affects your credit score. The amount of your total credit you have used, known as your credit utilization rate, makes up 30 percent of your credit score.
A good rule is to use less than 30 percent of your credit limit for each credit card; if your balance is higher than 30 percent, pay it down. Here are some suggestions on how to manage your credit card balances:
• Make multiple small payments — often called micropayments — during the month to keep balances down.
• Ask for a credit limit increase. When your credit card limit goes up, the credit utilization rate goes down.
• Tackle balances on the credit cards with the highest credit utilization rate first.
How fast does it work? Credit card issuers typically report to the credit bureaus every month. Once the creditor reports your lower balance, the improved credit usage will reflect in your credit score.
If you need help understanding credit, many resources are available, such as financial education classes MSU Federal Credit Union offers on campus for free throughout the academic school year. Find out more information by visiting financial40.org.