Yeah, you remember that whole permanent record thing with which teachers and principals used to threaten us when we were in grade school? Well, that’s largely a mythical thing about which no one in the world of work cares.
However, there is in fact a permanent record about which everyone cares when it comes to your personal finances. Moreover, the information it contains can determine whether you get a place to live, a car to drive, insurance and in some cases, even a job.
That’s what a credit report is — and how it can influence the quality of your life.
How It’s Compiled
In the simplest terms, your credit report summarizes how you’ve handled financial responsibility when it’s been extended to you. Every time you make a monthly payment (or don’t make one when it’s due) the lender conveys that information to the major credit reporting agencies operating in the United States — Experian, Equifax and Transunion.
The information these companies compile is then used to aggregate a numerical ranking, which is known as your credit score. While lenders are not required by law to report to these agencies, most do so, because the process has proven efficacy when it comes to helping them assess the veracity of borrowers.
What it Contains
In addition to all of your current personally identifying information, any name and address you may have associated with your Social Security number is listed on the report. Your birth date and phone number(s) are listed as well.
You’ll also find a listing of all of the credit accounts opened using your Social Security number — whether you opened them or not. The date the account was opened and closed, as well as the name of the creditor will be there too. The type of account will be listed — like if you’re leasing vs buying a car for example — along with the current outstanding balances and payment histories of your accounts.
Inquiries about your credit history will be listed, as well as any liens or judgments filed against you. This includes foreclosures, bankruptcies and civil suits. In some cases, overdue child support can appear on your credit report too.
Hard Inquiries vs. Soft Inquiries
Those aforementioned inquiries fall into one of two categories — hard vs. soft. A hard inquiry is logged when a potential lender checks your credit report in an effort to determine whether you qualify for a loan.
Soft inquires occur when you check your own credit report, as well as when lenders review your report as a precursor to soliciting you with offers of financing — whether pre-approved or pre-qualified. It’s important to note, these lenders will subsequently file a hard inquiry if you decide to apply for a loan they’ve offered.
Why it Matters
As we mentioned above, that credit report is in many ways a permanent record of your financial behavior as an adult. A strong history of on time payments and minimal use of credit is looked upon favorably by the lending community.
On the other hand, a record reflecting the exact opposite gives lenders pause when considering a credit application. We say pause, because there are creditors out there who will make loans to people with less than perfect credit histories. However, they charge much higher rates of interest to counter the risks lending to a borrower with a poor credit history entail.
So, what is a credit report really? It’s your financial report card. High scores get you lots of privileges and acceptance at low rates of interest. Low scores narrow your options considerably and almost always mean you’ll pay more for whatever you get.