What is a credit report, and why should I care?

In the spirit of Santa, credit reporting agencies are keeping track of whether you’ve been financially naughty or nice.  Ever owed a debt? Chances are you have a credit file (three in fact). These central files keep tabs on your debts and repayment history.  The information they contain (accurate or not) often determines if you can borrow money, the interest rates you’ll pay, which apartment you can rent, and how competitive you’ll be in landing a job.

The big three credit reporting agencies (Experian, Transunion, and Equifax) gather information from your creditors each month about your payments, balances, and missed payments.  They compile this data into a report that they sell to lenders, insurance companies, landlords, and even prospective employers.

The Good News:  Since most Americans don’t live in small communities where the local banker knows them personally, the credit reporting system provides a universal framework in which each person is judged by a common set of standards. The system allows banks and companies to evaluate your likelihood of repaying money they lend without having to know all that much about you personally.

The Bad News: An estimated 80% of credit reports contain errors, ranging from incorrect biographical and balance information, to missing accounts, to fraudulent or incorrectly attributed accounts.  Furthermore, an estimated 1 in 4 credit reports contain an error(s) that could directly result in the denial of credit. Report accuracy overall is very difficult to determine, but we do know that these estimates are in the ballpark. Negative marks, whether accurate or inaccurate, stick around for just over 7 years on your credit report.  So the damage lingers.

Such errors can prevent you from getting credit, or severely curtail the amount of credit extended to you.  Honestly, a $500 limit on a credit card can do more harm than good (because you’ll likely need to use more than 30% of the card’s limit – see our article on credit scores for more info). In the wake of the financial crisis, more and more landlords are getting credit reports to evaluate who will be a reliable tenant.  Those with federal security clearances may recall that their credit report was pulled to evaluate their suitability.  Now, many private companies are using credit reports and scores to evaluate your suitability as an employee.

It is important that you establish a good credit history and keep an eye on your report to prevent any errors from hurting you down the road. You can get more information about credit reports from the FTC.

Your credit score—it’s not just about getting a credit card or mortgage anymore.