Check Your Credit Report
Do you know how credit works? It’s simple: lenders set interest rates for borrowers based on their risk, knowing that some borrowers will be unable to pay them back. The more likely that a customer will default on the loan, the more interest a lender will charge to compensate for this risk. To assess how risky a borrower is, lenders use a credit report from one or all of the three big credit bureaus: Equifax, TransUnion, and Experian. These credit bureaus collect payment information from lenders and then provide it to banks, insurance companies, employers, and government agencies who request it for permissible purposes.
Your credit reports will contain of the following types of information:
- Your personal information, including your name, address and Social Security number.
- A summary of your accounts, both open and closed, going back for several years, showing credit limits, balances and your payment history.
- The histories of your accounts, such as the balances, any past-due amounts, the duration, type of accounts, date opened, date of the last payment, payment amounts, charge-off amounts, high credit, comments and payment record for the past seven years.
- Any public records of bankruptcies, tax liens, court judgments or child-support information. Charge-offs or collection accounts stay on record for up to 7 years and bankruptcies show on your report for up to 10 years.
- The credit inquiries, other than your own, from creditors and others you’ve given permission to, such as employers and insurance companies. Credit inquiries show on your report for up to 12 months.
Your credit report will not contain your gender, race or ethnicity, national origin, religious preference or any other personal information that doesn’t apply directly to the way you handle debt and repayment. Neither will it contain any checking/savings account information, charge-offs or collections of more than seven years ago, nor bankruptcies of more than ten years ago.
Usually this process of reporting your credit information works well and provides good information on how well borrowers repay their loans, but a 2004 CALPIRG study reveals that 25% of credit reports contained errors serious enough to deny credit and 54% of reports contained less serious errors. Mistakes on your credit report can result in higher interest rates, higher insurance premiums, and even being denied for a job.
How much can bad credit cost you? A borrower with excellent credit may qualify for a 6% mortgage interest rate, while another with worse credit may get the same loan at 7.5%. Over a 30-year mortgage on a $200,000 loan, this 1.5% difference can amount to nearly $70,000 more in interest! Because so much is riding on your credit history, it’s important that you review your credit file annually to correct any errors. Here’s how to review it:
- Pull your credit report from www.annualcreditreport.com
- Review your credit report to locate any errors
- File a dispute letter with the credit bureau explaining the incorrect data. Be as specific as possible and provide proof if you are able. Send the letter by certified mail. The credit bureau will have 30 days to correct the mistake.
Scott Crawford is CEO of DebtGoal.com, a do-it-yourself system for getting out of debt and lowering your interest costs. DebtGoal.com incorporates all of the techniques discussed in this post and can help users understand and get visibility to and manage their debt finances.
Tags: credit report, credit score, Debt Management
