Having the ability to apply and be approved for credit by a lending institution is essential for most people. Checking your credit report on an annual basis can help to ensure you are aware of what is on your credit report. By Keeping up to date on your credit report, you can make any adjustments needed to improve your credit score and qualify for lending in the future, should you need it.
Credit Report Overview
A credit report is a record of your personal credit history compiled by credit bureaus using data submitted by your creditors. Before creditors approve a new loan or line of credit, they will carefully review your past borrowing and repayment practices to determine if they want to extend your credit, and if so, by how much.
Importance of an Annual Review
The information on your credit report can affect how much money you can borrow and the interest rate applied to the loan. Additionally, you should review your report for the following reasons:
- To identify any errors and dispute them. A study conducted by the Federal Trade Commission found that 26 percent of study participants had a minimum of one potentially material error on one of their credit reports, so it’s wise to check yours for mistakes.
- Your credit may be affected by the mistakes of others. For example, if you cosign a loan for a friend or relative and they forgot to make a payment, it could adversely affect your credit score. In situations such as this, you may not become aware of the negative impact this could have on your credit without reviewing your credit report.
- You may identify theft or credit card fraud. If someone has been using your name and Social Security number to apply for credit or is making purchases with your existing credit information, you may not become aware of it unless you review your credit report.
- You will save time and money by being proactive with your credit standing. By reviewing all three of your credit reports at least once per year, you can ensure your credit stays protected continuously. That will save you time when you decide to apply for a loan since you won’t have to review and potentially dispute errors when your loan application is under review, and you will not have to potentially pay excessive interest as a result.
- You can obtain your credit report for free. The Fair and Accurate Credit Transactions Act of 2003 (FACTA), provides you with the right to view your credit report from each of the three major credit bureaus for free once every 12 months.
How to Get Your Free Credit Report
Obtaining your free credit report is easy. Just go to the federally authorized website AnnualCreditReport.com. At AnnualCreditReport.com, you can get reports from Equifax, Experian, and TransUnion, the three major reporting agencies.
Each of the credit bureaus compiles your credit report independently from each other, although their information sources are the same.
What to Look For
Above all, you should review your credit report for errors or inaccuracies. If you discover an error or mistake, you should contact the credit agency that is reporting the inaccuracy as soon as possible.
Reports prepared by different credit bureaus may provide the same basic information in different formats. The components you will likely see and should review on your credit report, include:
- Credit summary: This section provides a summary of your open credit accounts including, your credit limits, how much you currently owe, and payment history.
- Accounts: A summary of credit accounts including credit cards, mortgages and auto loans.
- Debt by account type: On this section of your credit report, you will find your debt broken down into different categories. One account type may be “Installment" loans, for example, a car or home loan, where you make payments typically in regular and equal installments. The other is “Revolving” credit card debt, which is a debt balance that may vary from month to month.
- Account age: Here you see how long you have maintained credit with different lenders. Ideally, you would prefer to have a longer credit history with a few creditors than shorter durations with many creditors. So it is wise to keep open your oldest accounts, even if they have a zero balance.
- Length of credit history: How long you've been using your card. This could be shown as 8 years, 10 months for instance.
- Average account age: This is the total months of all accounts on your credit report from the open dates to the present, divided by the number of accounts. Oldest account: account with the earliest open date. Newest account: account with the most recent open date. 10 years, as an example.
- Inquiries – Requests for your credit history: This section reflects how many times you have applied for new credit in the past few years. Sudden increases in this number may cause lenders to think you are too risky — so only seek new credit when you truly need it.
- Potentially negative information: Here you could see a snapshot of adverse information including the number of instances of late payments, negative accounts and collection information.
Whether you are looking to apply for an additional credit line or maintain your existing credit line, it’s important to review your credit reports annually for accuracy. It may also be a time of reflection to make changes to impact your credit score positively.