Credit plays a substantial role in everyday life. Your credit reputation may define if a company decides to lend to you. It may impact how much you pay for car insurance and your ability to qualify for a job. Understanding credit reports is the starting point of learning how to build your credit rating over the long term.

What Is a Credit Report?

A credit report is a long, detailed account of your financial history. It details who has lent you money, if you made payments on time, and how much debt you have. It also helps potential lenders know what level of risk you present to them if they decide to lend you money. Your credit report provides information on your past credit use and current debt.

Lenders consider the information on credit reports vital. They believe that a person's past actions and credit history directly reflect what they will likely do in the future. For example, a person with a history of making late payments is more likely to make late payments in the future.

You have the right to see a copy of your credit report. To do that, visit AnnualCreditReport.com. You can get a free copy of your credit report from each of the three credit reporting agencies once every 12 months.

Credit Reporting Agencies

A credit reporting agency is an organization that gathers information and organizes it into a credit report. There are three credit reports used in the U.S. by lenders, and they are Experian, Equifax, and Transunion. They are tasked with gathering credit usage data and compiling it into a report that qualified lenders can see when requested.

Lenders provide information about your credit use to the credit bureaus. This includes credit card lenders, personal loan lenders, student loan lenders, auto loan lenders, and mortgage lenders. The information collected by the credit reporting agencies typically includes:

• How much debt you have.
• The type of loan you have.
• When the credit line was open.
• Your credit limit, if applicable.
• The highest amount you owed.
• If you make payments on time.
• If you are late on payments, are you 30 days, 60 days, or 90 days late?

In addition to this, your credit report will include additional information including:

• Your name and any names you are known by
• Your date of birth
• Your Social Security number
• Current and previous known home addresses
• Employer information
• Phone numbers associated with your accounts
• Past employers

Any other information reported about you from your lenders is included here. It should always be accurate – mistakes here can lead to costly problems later.

Your credit report does not include the following information:

• Whether or not you are married
• Your bank account balances
• The level of education you have
• Your income
• If you are married, it will not include your spouse's name unless that person is reported by a creditor as such.

All of this information helps to provide lenders with insight into how much credit you have, what debts you owe, and how well you use that credit to manage your finances.

Credit Scores

To make it easier to understand how well a person uses credit, data from credit reports is turned into a numerical figure called a credit score. Various organizations create credit scores, the most common being VantageScore and FICO.

Credit scores range from 300 to 850. The higher this score is, the better. It shows that you make payments on time and use credit wisely, and this figure helps lenders better understand if you are likely to pay debts back on time.

If you have a lower credit score, that may indicate you have struggled with payments or have no experience with using credit.

You can improve your credit score in several ways:

• Make payments on time. This is one of the most significant factors in determining a credit score.
• Use credit. You cannot have a good credit score if you do not have a credit history.
• Keep the amount of debt you have low compared to your credit lines. Owing less than 30% of your credit limits is ideal.
• Have various credit types, such as secured loans like auto loans and mortgages and unsecured loans like credit cards.
• Keep hard inquiries to a minimum. These occur when you apply for a loan through a lender, and they check your credit score.
• The length of time you have had and used credit. A long history of credit use is ideal.

How Are Credit Reports and Scores Used?

Lenders use credit reports and scores to get a good idea of a borrower's risk level. If you want to buy a car but have no proven history of making timely payments, the lender views you as a higher risk, even if you have never made a late payment.

You should also know that a higher credit score offers less risk to a lender, often leading to lower interest rates when you borrow money. Because of this and how important it can be in buying real estate or a car, you'll want to strive to improve your credit score consistently.