How Your Credit Report Can Help You!

Even if you don’t work in finance or have little knowledge of the industry chances are you’ve heard the term “credit report” thrown around. While many assume this is some sort of cryptic document that can only be deciphered by savvy bankers the truth is they are financial tools that can and should be used by everyone!

So what exactly are credit reports and who produces them?

If you were to order your own credit report the first thing you would see is a large number roughly between 300-900. This is your credit score which is represents just how likely you are to repay a loan should you be granted one. The higher the score the better and each range has a corresponding default rate.

For example, from 700-800 the default rate could be 1% meaning that for every 100 loans the bank issues to people with a credit score in this range, 1 of them will not be paid back. Once you read a bit more of the report, you will notice that there is a summary of each credit card, line of credit, mortgage and loan you have taken out along with details about whether or not there are any outstanding balances. Although the exact formula used by Equifax and other credit bureaus is a bit of a mystery, generally speaking every time a payment is made within terms your credit rating improves.

However, carrying a balance on your credit card, provided you are making the minimum payment every month, may actually improve your rating since these are the types of clients lenders earn the most from and therefore want to attract. Generally accounts stay listed on your credit report for 6 years, at which point they are removed.

Why should I track my credit score?

Now that you know a bit more about credit reports you may be wondering why you need to use one yourself.

First of all, given that any loan or credit card you apply for is strongly tied to your credit history you want to make sure all of the information on your report is accurate. Not even credit agencies are immune to making errors and the last thing you want is to be denied a loan or have to pay an exorbitant interest rate as a result of a problematic account on your credit report that was actually placed there as an error.

Additionally, if you see a number of items on your report that you have no recollection applying for it may be a sign you are the victim of identity theft! The earlier you detect these signs the more effective you can mitigate the potential losses that will follow. Finally, if you have some accounts on your report that are dragging your report down you want to monitor these and make sure they are taken off after 6 years!

Hopefully this article has encouraged you to order your credit report and read it through - we recommend doing this at least annually. Many agencies will provide you with a copy of your own report at a low cost either by post or email.