How To Read A Credit Report
Want to get all the information you need about a prospective lendee in one quick and easy review? You can with a credit report. By understanding its different sections and what they mean, you can make more informed lending decisions.
This article will teach you how to read one like a pro. Once you know what to look for, you can spot potential red flags and assess a borrower's credit risk. No more hiding bad credit history, so you can feel confident that you're making the best decision for your business. Let's dive in.
What Is A Credit Report?
A credit report is a document that lenders use to assess a borrower's creditworthiness. It includes information about the borrower's financial history, including their credit utilization, payment history, and outstanding debts.
The report also contains public record information, such as bankruptcies and foreclosures. This information can help lenders assess borrowers' ability to repay a loan. But how does a credit report differ from a credit score?
A credit score is a numerical representation of a borrower's creditworthiness, while a credit report is a more detailed look at the borrower's financial history. Credit scores are often used as a shorthand to assess risk, so as a lender, you'll always want to pull and review a borrower's credit report to get the full picture of their financial history.
Why Is A Credit Report Important?
A credit report is an essential tool for lenders because it helps you assess a borrower's risk. By understanding a borrower's financial history, you can make more informed decisions about whether or not to extend credit.
A credit report can also help you identify potential red flags, such as a history of late payments or outstanding debts. By reviewing a credit report, you can better understand a borrower's financial health and make more informed lending decisions.
For example, let's say a person is considering a loan for a small business. You will likely request a copy of their credit report to get an idea of their creditworthiness. By reviewing their credit report, you can see if the borrower has a history of making timely payments or if they have any outstanding debts.
You can also use the borrower's credit report information to determine the interest rate you will charge on a loan. The more risk a borrower poses, the higher their interest rate. In contrast, you may offer them a lower interest rate if they have a strong credit history.
Bruce McClary, the spokesperson for the National Foundation for Credit Counseling (NFCC), told CNBC that persons with high credit scores enjoy lower interest rates, higher credit limits, and more favorable terms when they borrow. In fact, they could easily save over 1% in interest on mortgage payments. This means a borrower could save at least $200 monthly on a $300,000 house under a 30-year mortgage.
Imagine the other advantages people with high credit scores could enjoy, like better auto loan interest rates or the ability to lease a car without a security deposit. It’s no wonder that so many individuals are interested in learning how to improve their credit scores.
Who Makes Credit Reports?
There are three major credit bureaus in the United States: Experian, Equifax, and TransUnion. These companies collect information on borrowers and create credit reports. Borrowers can get a copy of their credit report from each bureau.
Other departments are available to serve them. However, keep in mind that most lenders will always pull their data from one or more of these three because they are the most widely used and most well-known.
Where Can You Get A Credit Report?
Anyone can obtain a copy of their credit report from each of the three major credit bureaus. Experian, Equifax, and TransUnion all have websites where they can request a copy of their credit report.
Borrowers can also get a free copy of their credit report every 12 months from AnnualCreditReport.com. This website is a joint venture between the three major credit bureaus, so it's a good resource for getting a free copy of anyone's report.
On another note, fraudulent activities such as identity theft are more common than you think. Therefore, people have a higher chance of becoming a victim if they don't check their credit reports regularly. Meanwhile, as a lender, you should also be on the lookout for any fraudulent activities and report them immediately as soon as you notice something suspicious.
What Is Included In A Credit Report?
The information included in a credit report can vary depending on the bureau. However, some key pieces of information are typically enclosed in all three reports.
Here is a quick rundown of some of the most important ones:
Personal Information
The personal information section includes the borrower's name, Social Security number, date of birth, current and previous addresses, and employer information.
Credit History
The credit history section contains a list of the borrower's current and past credit accounts. It will also show the borrower's payment history, credit limit, and balance owed on each account.
Public Records
The public records section includes any bankruptcies, foreclosures, or tax liens that have been filed against the borrower.
Inquiries
The inquiries section includes a list of companies that have requested the borrower's credit report.
Lenders will typically pull a borrower's credit report when considering them for a loan or credit card. Therefore, you can use this section to track how often a borrower has applied for new credit.
Let's dive a little deeper into each section and show how lenders like you should read them to make better-informed lending decisions below.
How To Read A Credit Report
A credit report may look confusing at first glance, but it is actually not that difficult to understand. Below are some tips on reading a credit report and what information you should be looking for.
Personal Information
Because this area of the credit report includes details about the borrower that is personal and unique to them, it's always a good idea to verify that everything is correct. Check the following to make sure they match the information on the application:
- Complete name
- Social Security number
- Date of birth
- Current and previous addresses
- Employer information
Use the borrower's official identification cards such as passports or driver's licenses to verify the information on the credit report. If something doesn't match up, it could be a sign of identity theft. It's also possible that the credit report belongs to someone else entirely.
In this case, you should order another report with the correct information and disregard the first one. You can also file a dispute with the credit bureau to have the incorrect information removed from the report.
Expert tip: If you're ever in doubt about the authenticity of a credit report, you can contact the credit bureau directly to verify that the account is legitimate.
Credit History
This is arguably the most important section of the credit report, as it contains information about the borrower's financial history. This area will give you a good idea of how responsible the borrower is with their money and whether or not they're likely to repay a loan.
When reading this section, pay attention to the three groups of information:
- Mortgages (home loans)
- Installment loans (car loans, personal loans, etc.)
- Revolving credit accounts (credit cards)
- For each type of account, the credit report will list the following information:
- Account Status (open or closed)
The account status will tell you whether or not the borrower is still using the account. If it's closed, they're no longer using it and are no longer responsible for the debt.
Credit Limit
The credit limit is the maximum amount of money the borrower can spend on the account. The balance owed is the amount of money the borrower currently owes to the account.
Payment History
This is a record of the borrower's payments over time. You'll be able to see if they've made the balance of their payment owed on the account.
If you see that the borrower has missed several payments or is constantly late with their payments, this is a red flag. It's an indication that they may struggle to repay a loan fully and on time.
Length Of Credit History
This is the amount of time that the account has been open. Longer credit history is generally better than a shorter one, as it shows that the borrower has a history of managing their finances responsibly.
Equifax, Experian, and TransUnion have different ways of reporting this information, so consider this when looking at the credit report.
Expert tip: Remember that not all late payments are created equal. A fee that is 30 days late is not as serious as a payment that is 90 days late. If you see a pattern of late payments, that's a bigger concern than one or two isolated incidents.
Public Records
This section of the credit report will list any public records associated with the borrower. It could include bankruptcies, foreclosures, and tax liens.
If you see any of these items on the credit report, it's an indication that the borrower has had difficulty managing their finances in the past. They may be at a higher risk of defaulting on a loan, so you must consider this when deciding.
Expert tip: When looking at the public records section, pay attention to the date of the incident. The further in the past, the less impact it will have on the borrower's creditworthiness.
Inquiries
The inquiries section lists companies that have requested the borrower's credit report in the past two years. Look out for the two types of inquiries:
Hard Inquiries
A hard inquiry is when a company requests the borrower's credit report to make a lending decision. For example, if the borrower applies for a loan, the lender will request their credit report. Hard inquiries can hurt the borrower's credit score, so paying attention to them is important.
Soft Inquiries
A soft inquiry is when a company requests the borrower's credit report for non-lending purposes. For example, if the borrower applies for a credit card, the issuer will ask for their credit report. Soft inquiries will not hurt the borrower's credit score.
When looking at the inquiries section, pay attention to the number of hard inquiries. Too many hard inquiries in a short period can be a red flag, indicating that the borrower needs credit.
You should also look at the date of the inquiries. If they are recent, it could entail that the borrower is in a financial bind and is trying to get new lines of credit.
Expert tip: If you see a hard inquiry on the borrower's credit report, you can ask them to explain the circumstances. Doing so will help you to understand if it's a one-time event or if it's part of a pattern.
What To Look For When Reading A Credit Report
When you're reading a credit report, you should keep a few things in mind:
- Look at the overall picture. Is the borrower's credit good or bad?
- Look at the specific details of each account. Are there any red flags?
- Take into account the borrower's explanation of their credit history.
When considering a borrower's credit report, remember that it is just one part of the puzzle. You should also consider the borrower's income, employment history, and other factors. By looking at the whole picture, you'll be able to make a more informed decision.
What Is A Good Credit Score?
A good credit score, according to Equifax, is generally considered to be a score of 670 to 739. On the other hand, credit scores from 580 to 669 are fair; 740 to 799 are very good, and 800 upwards are outstanding.
Conclusion
A credit report is an important document that lenders use to assess borrowers' creditworthiness. By understanding how to read and interpret one, you can paint a clear picture of a borrower's financial history, which will help you make informed lending decisions.
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