Your first step to repairing credit scores and rebuilding finances starts with the credit report. Thanks to the Fair Credit Reporting Act of 2003, each consumer is now entitled to a free credit report from the main credit reporting agencies, such as TransUnion, Equifax and Experian.
Each of these credit bureaus use different designs for their credit reports. But they all provide the same basic pieces of information. This guide reviews the most common elements of most credit reports.
Structure of the Credit Report
Credit reports display the applicant’s recorded history for up to ten years. By law, consumer credit may remain on a consumer’s credit report for only seven years. Judgments—such as bankruptcies, foreclosures and lawsuits—and debts owed to the government usually remain for up to ten years.
Credit reports normally contain the following sections:
- Borrower background information
- Credit score
- Credit history
- Inquiries
- Public records
- Consumer comments
- Creditor information
Background information
The background information section provides identifying information for each individual — if it has been previously recorded from other credit applications and public records:
- Subject identification. This section identifies the person’s full name, home address and social security number. The credit report will also list other name arrangements and social security numbers used and previously recorded.
- Marital information. This section displays the person’s reported current marital status, dependents and prior marriages.
- Employment. This section identifies the individual’s current employer, position and income level; most preliminary or basic credit reports will not have this information. Previous employers, positions, income and dates of employment are also provided, if they have been previously reported to the credit bureau.
- Home address. The credit report will indicate the individual’s current home address, based on the provided information. It may also provide previous addresses, based on information in the person’s credit records.
- Housing. If available or reported, this section identifies the individual’s current housing type (rent or ownership) and monthly housing expense.
- Additional income. If secondary or non-employment income has been reported, that amount will be identified in this section.
Credit score
The free credit reports provided by the credit reporting agencies typically do not provide a credit score.
If you do obtain a credit report that includes a credit score, make sure that you understand which credit scoring system is being used.
The FICO credit score is the traditional and most commonly used credit scoring system. Each of the three major credit reporting agencies use a re-branded version of the FICO credit score developed by the Fair Isaac Corporation:
- Equifax uses the Beacon score
- Experian uses the Experian/Fair Isaac Risk Model
- TransUnion uses the Empirica scoring system.
Credit history
The meat of the credit report is the section providing details of your credit history.
Average credit reports normally span at least four pages. Obviously, consumers who have opened many creditor accounts during the past seven years will have longer credit reports. The credit history portion of the report will normally contain at least nine types of information, which are divided and subdivided into columns.
A more detailed discussion of each column field is provided after the following list:
- Credit grantor. The reporting creditor, lender or collection agent is identified in the first column.
- Date last reported. This column indicates the month and year in which the creditor most recently reported the status of the account.
- Date opened. The beginning date for the credit account is listed in this column.
- Highest credit. This column indicates either the maximum credit limit or the original loan balance.
- Balance owed. This column identifies the current balance.
- Past due amount. Any past due amounts are listed in this column.
- Number of months reviewed. This column provides a tally of the number of months that the creditor had reported on the account.
- Frequency and duration of late payments. Payments that were reported as more than 30 days late are identified in these three columns.
- Credit payment type. This column identifies the type of payments required by the creditor.
- Terms and manner of payment. This final column identifies payment amounts “if known” and the individual’s record of payments.
Credit grantor
This section contains two important items:
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- The name of the creditor for that account.
- The account number of each reference is indicated immediately following the creditor’s name.
Note that some creditors report a different name than their publicly known brand; some accounts may also be listed twice under different creditor names. A few creditors, notably American Express, omit the full account number in their reports to the credit bureau.
So you should be prepared to review the account with an eye toward reorganizing the accounts so they match your own records.
Date last reported
The date in the second column is the date of the last report submitted by the creditor.
Most lenders and major creditors will issue reports every month; other creditors will also report monthly if there is a balance on the account. Closed and terminated accounts will often record the termination date in this column.
Current major accounts should display the most recent month. Lenders and creditors want to see that the individual has sufficient current (open) credit lines. So having no current credit is not the sign of good credit management.
If you see a current account that has not been updated for several months, then your credit report may be missing out on recent history that could affect your score.
Date account was opened
This self-explanatory column indicates the date that the individual opened his or her account with the creditor.
A number of young credit accounts is often an indication that the individual is trying to build or rebuild his or her credit record. But new lenders and creditors will insist on minimum track records. In fact, most creditors and lenders tend to discount credit accounts that are less than one year old—unless there are negative entries for that account.
Negative entries, such as late payments and delinquencies, on relatively new accounts are especially damaging.
Highest credit
This fourth column indicates the credit limit or original loan balance for the account.
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- With revolving accounts, this is the account’s maximum credit allowance.
- For installment loan accounts, the amount in this column indicates the original principal balance.
Credit grading systems examine the ratio of current balances and credit limits, especially on credit cards… to determine how dependent the person is on his or her credit cards.
Current balance owed
This fifth column indicates any current obligations still due on the account.
With installment loans, this entry provides the current principal balance. This normally continues to decrease over time, as more payments are made. However, in some cases, the current loan balance is greater than the original (highest credit limit), which usually means that the borrower hasn’t been making payments on the loan or that the monthly payments are initially set low (too low to make a dent on the balance or interest due).
With credit cards and other revolving accounts, this column provides the current account balance. Credit accounts that have been “maxed out” have a very negative impact on the individual’s credit history and will lower the individual’s credit grade.
One of the best opportunities for improving credit scores is to lower the balance on current (active) credit card accounts — or increase the limits, so as to improve the ratios.
Past due amount
If there are any past due amounts, they are listed in this column.
Most lenders and creditors will not list a payment as past due unless it is more than 30 days after the scheduled payment date. Obviously, any entries in this column is damaging to the individual’s credit grade.
The term delinquency normally applies to past due payment amounts. Short of bankruptcies, foreclosures and major judgments, the entries in this past due columns apply the heaviest negative effect on the individual’s grade, because this column displays the account’s current problems.
Number of months reviewed
This column indicates how many months the individual’s record with the credit reference has been reviewed. This is normally tied closely to the date the account was opened.
Frequency and duration of late payments
This section itemizes the individual’s late payments according to severity. The entries in these columns record only late payments that were actually paid. The earlier “past due amounts” column indicates what is still owed.
Any recorded late payment is detrimental to the individual’s credit grade. As can be expected, however, as payments become later and more delayed, more damage is inflicted on the individual’s credit.
Although lenders and creditors have varying definitions of late payments, credit reports only consider payments late when they are at least 30 days past the due date:
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- 30-59 days late. The first column indicates how many times the credit reference has reported a past due amount that was paid within the 30 to 59 days of its due date. This is the most common and least damaging of the late payments.
- 60-89 days late. The second column indicates how many times the credit reference has reported a past due amount that was paid within 60 to 89 days of its due date. A number of such late payments are very serious and indicate poor credit management on the part of the consumer.
- 90-days late. The third column indicates how many times the credit reference has reported delinquencies that have lasted for longer than 90 days. Recent entries in this column can easily disqualify individuals. A number of entries in this section shows a lack of credit management skills.
With most credit reports, any entries in these three columns will also contain a date (month & year only) for the indicated late payment. This will allow processors and underwriters to consider how recent or how long ago the late payment occurred.
Credit or loan type
This entry is normally combined with the final column that follows. This column identifies the type of credit account listed in each row entry, by use of a letter tag:
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- O – Open account.
- R - Revolving or option accounts, such as some of the major bank cards.
- I - Installment accounts, such as installment loans or credit cards with department stores.
- M - Mortgage accounts.
- C – Checking account credit, such as a line of credit.
Term & manner of payment
The last portion indicates the payment terms of each credit account, as well as a number grade that identifies the payment habits of the individual.
The payment terms for current accounts are typically listed as the basic monthly amount required. Revolving accounts will normally only indicate the minimum monthly payment required for the current balance. Installment loans will list the monthly loan principal & interest payment.
The number grade for the manner of payment indicates the individual’s current status on that account:
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- 00-The account is not rated, is too new to rate, or has been approved but is not being used.
- 01-The individual pays (or paid) this account within 30 days of billing. This is the ideal grade for all accounts, as it indicates that the individual is current.
- 02-The account holder is currently delinquent for more than one scheduled payment. A grade of two or higher will normally coincide with entries in the past due amounts column.
- 03-The account holder is currently two payments past due, with both payments still unpaid.
- 04-The account holder is currently three or more payments past due, with all payments still unpaid.
- 05-The account holder pays (or paid) in 120 days or more. This grade normally indicates that the borrower is at least four payments delinquent. However, such delinquency often translate into immediate default.
- 06-The account holder is making regular payments under a wage-earner or similar plan.
- 07-The account is in repossession or active collection. In such cases, the consumer’s credit privileges are typically assumed to be terminated.
- 08-The credit reference has charged the account off as a bad debt. This indicates that collection attempts have been unsuccessful.
Inquiries
The inquiries section lists every occasion that the consumer’s credit report was recently requested by any person, company or institution.
Each inquiry entry will include the name of the institution or person who requested the credit report, along with the date that the report was ordered.
Most credit reports will only list inquiries recorded during the past six to 12 months.
Public records
The public records section itemizes any reported judgments or governmental liabilities against the individual. This section will list instances of foreclosures, bankruptcies, tax liens and lawsuit judgments.
Each public record entry will provide a range of information about the incident, such as court document number, filing date, current status, discharge date (if applicable), judgment amount and judgment type.
Consumer comment
This final section will record any comments that the consumer may wish to include in his or her credit report. This space is usually reserved for disputes and explanations. If the consumer feels that a negative entry is inaccurate or undeserved, a dispute comment can be recorded to provide elaboration.
Creditor information
If the individual wishes to dispute any account, he or she may contact the creditor directly. The address and phone number of all creditors are available through the credit reporting agency. In fact, most credit reports will immediately provide an addendum page identifying the creditors. Individuals and loan processors can then contact these creditors directly for verification, updates and pay off statements.
If the individual believes that the account is false or incorrect, the individual can and should contact the creditor and credit bureau with a dispute letter. The creditor will compare the individual’s dispute letter information with its recorded data. By law, the creditor must respond to the individual’s dispute letter within 30 days or remove the disputed negative entry.
Analyzing Credit History
Credit scores are derived from the individual’s recorded credit history. When analyzing the credit report — for the purpose of rebuilding credit — you should concentrate on the negative entries. Specifically, look for the five types of potentially adverse entries that most creditors and lenders examine:
- Insufficient entries
- Recently opened credit accounts
- Late payments
- Current delinquencies
- Judgments
- Credit grade
If any of the above are found in an individual’s credit report, the individual must provide a letter of explanation—with supporting documents, if necessary—before the lender can give full approval.
Insufficient entries
The first step to grading a credit report is to count the number of entries and determine their adequacy.
A-grade credit will require at least four or five active credit accounts. Individuals with no active (open) trade lines, but with good previous account histories, are usually considered B-grade.
However, it is rare for any American adult to truly have no credit. But it does occasionally happen.
In addition, each credit entry must meet different program restrictions. For example, most lenders require the active credit accounts to be at least 12 months old to be considered. The credit accounts should also indicate the most current reporting date.
Recently opened credit accounts
New accounts and potential liabilities can be a problem because they can lower the individual’s net worth and increase the individual’s debt-to-income (DTI) ratio.
Specifically, lenders will review the inquiries section. The individual must confirm whether or not any inquiry entry resulted in a credit account or loan. If so, that account should be included in the credit report and in the individual’s liabilities calculation. Lenders are obviously concerned about hidden liabilities that may threaten the individual’s current qualification or future financial stability.
Late payments
As mentioned earlier, credit reports do not consider a payment as late until it is at least 30 days past the due date. By the way, the difference between a delinquency and a late payment is that the delinquency still hasn’t been paid.
When counting late payments, lenders and creditors focus primarily on the past two years.
Current delinquencies
First, it’s important to remember that delinquencies are different from collection accounts. When it comes to rebuilding credit, delinquencies can often offer greater opportunities for credit repair than collection payments.
Current past-due amounts are highly detrimental to a consumer’s credit grade because it indicates current problems. But because the accounts are still active, they can be brought back and used to rebuild credit scores.
Very serious delinquencies eventually become collection accounts. In such cases, the creditor has failed to persuade the consumer to bring their account current and has turned the account over to a collection agent. If the collection agent fails, creditors can then turn to civil courts for a legal judgment against the borrower.
Judgments
Civil court judgments against the individual are often the most serious negative entries in a consumer’s credit report, because judgments are normally the final stage in a long delinquency. Credit accounts will only lead to judgments after collection and default.
Other types of judgments include bankruptcies and foreclosures. These actions are court-ordered procedures that do not happen overnight.
Although bankruptcy is the single most detrimental credit rating, borrowers who recover from bankruptcy proceedings and demonstrate the ability to manage their finances should not be severely penalized. The date of discharge is the date used for analysis. A person may file for bankruptcy protection today, but the discharge may not occur until next month or next year or next decade. Borrowers who have been discharged from their bankruptcy within the past two years may be considered only if the bankruptcy was caused by circumstances beyond their control and if the individuals have since repaired and recovered their credit.
Credit grades
Although credit scores (reviewed in the Understanding Credit Scores section) are numbers based, personally credit has generally graded according to familiar letter grades.
Negative entries progressively damage the consumer credit rating. But it is not enough to simply avoid negative entries. Creditors and lenders want consumer to also demonstrate that he or she can manage credit. Thus, maintaining strong credit is a proactive task; having no recorded credit experience is not good enough to show adequate credit management.
- A-grade borrowers have excellent or very positive credit history. They usually have credit scores of 650+, with A-plus credit starting at 720. In general, A-credit borrowers must satisfy all of the following requirements: (1) no foreclosure or bankruptcy within the past seven years; (2) no late payments on their mortgage history during the past year and no more than one late payment in the past two years; (3) no more than one late payment on any installment loan during the past year and no more than two during the past two years; (4) no more than two late payments on revolving accounts during the past year and no more than four during the past two years; (5) no open collection accounts; and (6) a credit score of at least 650. A-grade borrower must have at least four or five open accounts recorded on the credit report.
- B-grade borrowers have good but slightly flawed credit. They usually have credit scores between 580 to 650. B-credit individuals usually have a good chance of improving to A-credit in a relatively short period of one to two years. B-credit borrowers normally have one or more of the following traits: (1) no bankruptcies or foreclosures in the past five years and no repossessions or major judgments in the past four years; (2) three to six late payments on mortgage and installment debts during the past two years; (3) five to eight late payments on revolving debts in the past two years; (4) unpaid collections of $500 to $10,000. Note that a borrower with no recorded credit history is normally graded B.
- C-grade borrowers have damaged credit, but their credit records will often show some glimmer of effort. C-grade consumers are usually delinquent on several accounts, and demonstrate an inability to efficiently manage debt; they usually have credit scores between 500 to 579. C-credit borrowers usually have one or more of the following traits: (1) a bankruptcy, foreclosure or repossession during the past two to three years; (2) at least 60-90 days behind on mortgage or large installment debts ; (3) at least nine late payments on revolving accounts in the past two years; and (4) more than one open collection account. However, with proper attention to debt payments, a C-credit borrower can usually return to A-grade within two to three years. If there has been a bankruptcy, foreclosure or repossession in the past two years, the borrower can still salvage a C grade by showing that he or she has made strong efforts to regain creditworthiness.
- D-grade borrowers have tremendously damaged credit, with no recorded display of recovery. Some lenders label this level E-grade or F-grade, but the net result is the same. D-grade borrowers are often currently in foreclosure, bankruptcy or repossession—or have just completed such actions within the past year. Consumers can still be graded “D” when the foreclosure, bankruptcy or repossession is two to five years old if that consumer has not made strides in rebuilding credit. However, with proper attention to debt payments, a D-credit borrower can usually return to A-grade within five to seven years.
Regardless of where your credit falls, it’s important to remember that everyone has the opportunity to rebuild their credit grade to A-level.
It may take as little as a few months or as long as seven years, but it is feasible for everyone.