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Understanding Your Credit Report
If you're in the market for an auto loan, one of the first things you should do
is take a look at your credit report. This document provides the data that goes
into calculating your credit score; your credit score, in turn, plays a huge role
in determining what interest rate lenders will charge on your loan and whether
you'll be able to get a loan to begin with.
Awash in numbers and data, a credit report can look like gobbledygook to the uninitiated.
Getting up to speed on how it works is clearly important. Let's unlock its secrets.
Your credit report is a document that comprehensively details your credit payment
history. Ever owned a credit card? Or taken out a bank loan? If you have, it's
likely that information regarding your account activity will be reflected on your
report. But this sort of payment data isn't all that your report will contain.
Typically, four types of information are reflected:
- Personal information. This includes your name, spouse's name, social
security number, current and previous addresses, birth date and current and
previous employers. This data is culled from your past credit applications,
so its accuracy is dependent upon how completely and honestly you fill out
forms each time you apply for credit.
- Credit information. Included is information regarding each of your
accounts with banks, retailers, credit card issuers and/or other lenders.
Credit limits as well as loan amounts and balances are detailed, along with
payment patterns going back a few years.
- Public information. This includes bankruptcies, tax liens and monetary
judgments, and, in some states, overdue child support.
- Inquiries. Included are the names of those who requested and obtained
copies of your credit report.
Not all of this information remains on your credit report permanently.
- Positive credit information will remain on your report indefinitely, although
information about an account will fall off your report if nothing new is reported
for seven years.
- Negative credit information remains on your report for up to seven years
after the date of the original delinquency.
- The length of time for which a bankruptcy will dog your credit depends on
the type of bankruptcy that you file. Chapters 7, 11 and 12 remain on your
credit report for 10 years. If you file a Chapter 13 bankruptcy (under which
all or part of all debts owed are repaid under a court-approved payment plan),
it will be deleted from your report after seven years. All other public record
information typically falls off after seven years.
- Inquiries are typically cycled off your report after one to two years, depending
on the type of inquiry.
There is, of course, some personal information that your credit report does not
reveal. It doesn't reflect information about your race, religious preference,
medical history, personal lifestyle, personal background, political preference
or criminal record.
The following points shed some light on how lenders evaluate your report:
- As one would expect, on-time payments are viewed as a plus by potential
grantors of credit.
- A low debt-to-income ratio (under 20 percent) is ideal. This ratio is calculated
by dividing your total monthly debt (rent or mortgage payments plus credit
card minimum payments plus loan payments and the like) by your total gross
monthly income.
- Lenders tend to frown upon those with too many credit cards. The available
credit on these cards is viewed as being potential debt.
- Late payments hurt your rating. The later the payment (whether 30, 60 or
90 days) the more of a negative it will be.
- Frequent requests for additional loans or credit cards can count against
you. If you've had more than four inquiries made within the past year, it
will hurt your chances to get new credit.
- Numerous changes in address and/or employment may also hurt your rating.
Lenders like stability.
- As one would expect, items like bankruptcies and charge-offs are viewed
negatively.
If you find information that you believe to be incorrect in your credit report,
you'll need to address it. Contact the credit bureau in writing, including documents
that support your position. Make sure your letter lists your name and address.
Clearly identify the item you believe to be invalid, explain why you think it
is erroneous and request its deletion. The credit agency must reinvestigate disputed
items, usually within 30 days. The law states that erroneous information, or disputed
information that the credit bureau is unable to verify, must be deleted from your
file.
You're probably wondering how get a copy of your report. It may be ordered from
any of the three credit bureaus — Experian,
Trans Union and Equifax.
Remember, forewarned is forearmed. Even if you're not currently hunting for a
car loan, it's a good idea to take a look at your credit report now. That
way, problems can be addressed before they have a chance to hurt your prospects.
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