Why Is a Credit Report Important?

What Is a Credit Report?

A credit report includes your history of borrowing and repaying money in the form of loans and credit cards. Utility bill payment history may also be included on your credit report if your account is charged off or sent to collections. Your credit report documents when you opened each account and the amount you've borrowed. It also records whether monthly payments on each account were made on time.

Positive information, such as accounts closed in good standing, stays on your credit report for up to 10 years. Most negative data, including late payments and debt in default, remains for up to seven years. An exception is Chapter 7 bankruptcy, which stays on your credit report for 10 years.

Creditors send your account data to the credit bureaus—Experian, TransUnion and Equifax—once per month. You have three separate credit reports at each credit bureau, and some creditors may report to only one or two credit bureaus. Also, since each creditor could report information at different times, your credit report is updated frequently, and may look different from one day to the next.

What Does a Credit Report Include?

Here's what you'll find in your credit report:

• Personal information: You'll see your name, date or year of birth, Social Security number, addresses and past employers if you added them to previous credit applications.
• Open and closed accounts: All open revolving accounts, like credit cards and personal lines of credit, as well as installment accounts, like loans, will be there. Closed accounts also appear on your credit report, such as those that were paid off.
• Account details: Each account entry includes a record of your payments, along with other details such as the date the account was opened and its balance. The status of your account will also be included, including whether it's past due and for how long. When you default on a loan—typically meaning you've gone at least 90 days without paying—that's noted on your credit report. So are the associated negative consequences, such as repossession, sale of the account to a collections agency or foreclosure.
• Hard inquiries: When a prospective lender views your credit history to evaluate you as a borrower, that request gets logged in your credit report as a hard inquiry. This can cause a temporary drop in your credit score.
• Soft inquiries: Unlike a hard inquiry, a soft inquiry doesn't affect your credit score, but it will still end up on your credit report. A lender may conduct a soft inquiry when it prequalifies you for a credit product, and an employer background check or you checking your own credit also leads to a soft inquiry.
• Cosigned loans: Any loans you cosigned for someone else—and their payment history—will show up on your own credit report.

Why Does Your Credit Report Matter?

​​Your credit report is a key component of your overall financial health. When it includes a record of responsible credit behavior, a credit report can open doors to new opportunities. Here's how.

Your Credit Report Can Affect Your Ability to Borrow

Lenders typically check one or more of your credit reports when considering your loan or credit application, and review them for any signs that doing business with you could be risky. Each lender has its own tolerance for risk, but all typically view late payments as grounds for caution—the more numerous they are, and the more recent they are, the greater the cause for concern.

Lenders may view serious negative entries, such as accounts in collections, repossessions, foreclosures or bankruptcies, as even more worrying. Some lenders will only consider applicants for credit after their bankruptcies are several years old, or will offer high interest rates and fees until the applicant's credit score recovers.

Credit Reports Are the Basis for Credit Scores

Your credit scores predict your statistical likelihood of missing payments on an account in the near future. Credit scoring models calculate these scores by analyzing debt and payment information included in your credit report.

The most popular scoring models, FICO^® Score^{☉ Θ} and the VantageScore^® credit scores, generate scores that range from 300 to 850. Higher scores denote a lower likelihood of defaulting on a loan. Credit scores distill the information in your credit reports into a number creditors can easily evaluate.

Lenders Use Credit Scores to Help Make Lending Decisions

Lenders use credit scores to set the interest rates they charge on various loans, and decide whether to take on a borrower as a customer at all. For example, a lender might make it a policy to turn down loan applicants with credit scores below 500 or to offer its best available rates to applicants with credit scores above 750. It steers applicants with scores between 500 and 750 into different loan options, generally assigning higher interest rates to applicants with lower scores.

With a good credit score, you'll have the widest variety of credit cards to choose from, including those that come with premium perks and rewards. You may qualify for credit products that can save you money and help you meet particular goals, like balance transfer credit cards. You're also more likely to get favorable terms once you do qualify for a loan or credit card, which may be a personal loan with no origination fee, for example, or a fixed-rate mortgage instead of one with an adjustable rate.

Landlords, Insurers and Others May Check Your Credit Reports

If you're renting an apartment, a landlord or property manager might view a spotty payment history as grounds for turning you away or charging you a high security deposit. Similarly, utility companies might charge you a deposit on their hardware if your credit report concerns them. In states that use credit-based insurance scores to determine auto insurance premiums, a credit report with negative marks could mean paying more to insure your car.

Some prospective employers also check a limited version of your credit report, with your consent, when you apply for a job (though not your credit scores). This can be particularly common in the financial industry when your ability to manage money affects your success in the role.

Your Credit Report Can Help You Spot Fraud

Left unchecked, fraud could temporarily damage your credit and require lots of time and hassle to correct. On your credit report, hard inquiries you don't recognize or accounts you didn't open can indicate criminal efforts to borrow money or buy goods in your name. Spotting those signs early and taking immediate action to address them will spare you major headaches.

Why It's Important to Regularly Check Your Credit Report

Here are the top reasons to check your credit report on a regular basis:

• Find and fix errors: View your credit report and credit scores regularly to monitor them for incorrect information and suspicious activity. If you find data you don't recognize or that's not up to date, you have the right to dispute information on your credit report with the three credit bureaus for free.
• Prepare for big purchases or credit applications: Take a close look at your credit report several months before you plan to apply for a loan. That way, you can address any errors or negative items that might affect your ability to qualify. You can bring a past-due account current, for example, or request that an incorrectly reported late payment be removed.
• Understand what's affecting your credit score: When you know what's in your credit report and understand your overall financial health, you can make behavior changes that improve your credit scores. You may decide to put bill payments on autopay, for example, so you always make them on time, or pay down your credit card or loan balances.

Does Checking Your Credit Report Affect Your Credit Score?

Checking your own credit report does not hurt your credit scores. It will result in a soft inquiry on your credit report, and since soft inquiries are not risk indicators, they have no effect on credit scores. Hard inquiries, on the other hand, signify the intention to take on new debt and are statistical indicators of greater repayment risk. That's why credit scoring models might respond to them with a temporary, small reduction in your credit score.

How to Check Your Credit Report for Free

You can check your credit report for free weekly through each of the three credit bureaus at AnnualCreditReport.com. If you want to check it more often, you can get your Experian credit report for free anytime when you sign up for an Experian account. The other credit bureaus offer similar services.

How Often Should You Check Your Credit Report?

Check your credit report at least once a year so you can be sure there is nothing that concerns you. If you do find information you believe to be in error, you have the right to dispute it.

Since your credit report is available for free once a week from each of the three credit bureaus, however, it's a good idea to check your reports more often than annually. That will ensure you quickly pick up on issues like identity theft and inaccuracies.

It's best to review your credit report and credit score well in advance of making financial moves such as applying for a new loan or getting an apartment. Give yourself enough time to make changes in your credit habits or submit a dispute if need be. It's also a good idea to check your credit for fraudulent accounts if you have reason to suspect fraud or identity theft.

The Bottom Line

Credit reports are a key part of the lending system that makes it possible to borrow money when you need it. Your credit report reflects your borrowing and repayment habits, and it's wise to pay attention to how others may see it. You can check your Experian credit report anytime, and opt in to free credit monitoring, by signing up for an Experian account.