Credit Reports and
Credit Scores Explained— Without The Jargon
No one likes to read financial jargon. If someones says that they do, then they’re probably lying.
There are some people who have more incentive than others to read up on these types of things — reasons like: it’s their job or they’re a research nerd. But under few circumstances, do people receive pleasure from reading things like the Federal Reserve’s website.
Lucky for you — you don’t need to go near FederalReserve.gov to learn the ins-and-outs of credit reports and credit scores. I’m going to explain it to you like you’re 5 years old — and without the jargon.
Credit Report
Credit Report? What’s that again?
To put it simply, it’s a “record of your credit history.” Your credit report includes your: identity, existing credit, public records, and inquires about you.
Let’s say you pull your credit report. You will find the following:
- Your name, recent address, birthdate, and social security number (SSN).
- Your employment information.
- You’ll also find information (technical jargon is “tradelines”) about any past, or current loans. This includes: car loans, mortgages, credit cards, and student loans.
- If you’ve filed for bankruptcy, not paid your taxes, or have other civil liens, then these things will appear on your credit report.
- Your inquiries — in other words: anyone who has recently requested your credit report will also appear on your credit report.
Simple, right?
And why is that important?
It’s important because what you can do, where you can live, and even where you work can be hinged on your credit report. Try getting a credit card, auto loan, mortgage loan, renting an apartment, and even a job with a bad credit report. If your credit report is bad, then you’re more likely to either be paying higher interest rates for things you need or in some cases you won’t even qualify for the things you need.
Oh gotcha, so who is able to get the information put on my credit report?
There are three big companies that gather your data. They sift, sort, and calculate all of the information on your credit report. These companies are called “credit bureaus.” The three big ones are: Experian, TransUnion, and Equifax.
But, how do credit bureaus get my information?
The credit bureaus are able to obtain your information from creditors — such as banks, credit card issuers, and finance companies. They can also get your information from public records.
How do companies put information on my report?
For any company to place information on your report, the company must have permission by the credit bureau (called “data furnishing agreement” and “reporting accreditation”) to submit data. If the data is incorrect or not accurate, then the company that reported the mistake can get in trouble.
Okay I’d like to see that credit report, how do I get a copy? I don’t have to pay to see information about myself, right?
You can get a free credit report, once a year from any of the three credit bureaus at www.AnnualCreditReport.com. Alternatively you can use a website like Credit Karma or Quizzle.
So who else can access my credit report besides me?
Lenders, utility companies, employers or prospective employers, insurance companies, government agencies, or anyone with a legitimate business need.
I made some mistakes in the past, how long will negative information stay on my credit report?
Negative credit information usually stays on your report for 7 years.
Credit Score
So isn’t a credit report and credit score the same thing?
Not exactly. A credit score is a number between 0–850. This number is calculated by putting all of the information in your credit report into a series of secret, magical math equations (called “credit risk assessment algorithms”).
How can I improve my credit score?
- Paying your bills on time.
- Paying off an outstanding balance.
- Correcting errors on your credit report if they exist.
Why isn’t my credit score the same between Experian, TransUnion and Equifax?
Each of the three credit bureaus have secret (“proprietary”) math equations that calculate your creditworthiness.
Ok, so each credit bureau uses mathematical equations to determine if I’ll pay back debt? So what?
The three digit number, 0–850, assigned to your name is important. A high credit score can save you thousands of dollars in interest rates on credit cards, auto loans, and mortgages. Over a lifetime, a high credit score can save you hundreds of thousands of dollars. Take a look here.
I’m dying to learn more!
Ok, fine. You asked for it. Have fun.
