Note: This is part 1 of a two-part series on demystifying credit. For part two, click here.

My wife, Becca, and I recently bought a new car, which, for us, is a long process that involves going to multiple dealerships, talking to multiple salespeople, and of course, the occasional argument over which of our kids gets to sit in which seat for the test drive. We finally settled on a car and bought it.

About a month later, I received an alert that my credit score had dropped 50 points! As I reviewed my credit reports, the only thing that changed was that car purchase. I was annoyed, and even though I wouldn’t be buying or doing anything that would require a credit check any time soon, I was still frustrated with this change. Credit scores have a direct impact on many benefits and purchases you and your family make every day. Did you know that your credit can affect you being hired as well as the amount you pay for your insurance? And, of course, it affects the rates you pay on anything you finance, including credit cards, store cards, personal loans, and mortgages just to name a few.

This experience reminded me of the real struggle we all face in managing our credit and the confusion that exists about credit reports and how credit scores work. Therefore, let me help you demystify the complicated system of credit reporting and scoring so you can make the most of your good credit.

What is “Credit”?

When people use the term “credit” they may be referring to a couple of different things which probably causes some of the confusion or mystery around this topic. In its simplest form credit is simply receiving something of value today with a promise to pay for it at a future time – effectively you are borrowing someone else’s money and when you add in interest, you end up paying them a little for the benefit of using that money now.

Often when people reference “credit”, they are referring to one of two things: credit reports and/or credit scores. The first, your credit report, is essentially a history of all (or most) of your borrowing activities, including loans, credit cards, car loans, etc. The second, your credit score, is a number that results from a mathematical equation using the history from your credit report. While most people focus on their credit score, it is really the credit report itself that is most vital. Your credit score is based on the information in your credit report, so if you want to improve your score, you’ll need to focus on and improve what is in your report. Rubber stamp indicating balance has been paid

In order to better understand credit, we’ll focus this week on credit reports followed by next week’s article on credit scores. Today I’ll describe three basic steps to navigating the information in your credit report.

Step 1: Pull Each of Your Credit Reports

While we normally talk about “credit report” in the singular sense, there are actually three main credit reporting agencies (or credit bureaus) that compile this information and each provides a separate report with the information they collect. The three major credit bureaus are Equifax, Experian, and Transunion.

Consumer protection laws entitle anyone with a credit report to access each report once a year for each of these 3 credit bureaus. To access your free credit report(s) go to Once there, you can pull your credit report for a single credit bureau or you can pull all 3 credit reports. Much of the information will be the same across those reports, but there are often a few differences since some companies you owe money to will only report to 1 of the 3 bureaus.

Step 2: Review The Information In Each Report

If you’ve never looked at your credit report before, it can be overwhelming, but with the tips below, you’ll be able to understand every section and review it for accuracy. It’s not uncommon for some reports to be very lengthy depending on how many accounts you’ve had and how long your history is. While each of the reports is set up a little differently, each contains the same basic information. Here’s the basic outline of each:

Personal Information: This includes your name, current and past addresses, phone numbers, date of birth, and social security number. This section is often fairly short but make sure to check the information for accuracy.

Accounts Information: This section is often the longest and may take the most time to review. It provides details about each of your credit accounts such as auto loans, mortgages, credit cards, personal loans, etc. It includes current status (i.e. open, closed), date the account was opened/closed, what type of account it is, information about the balance, and terms of the loan. It also includes a history of monthly payments (i.e. paid as agreed, 30 days late, 60 days late, 90 days late, sent to collections). As you review this section, make sure each account listed was/is a valid account you have had in your name. Also, make note of any late payments. A pattern of late payments (particularly if it’s recent) will hurt both your credit score and reduce your chances of approval on future loan applications.

Negative/Derogatory Items: Items in this section include records of accounts in collections because they were not paid as agreed and items of public record such as bankruptcies, garnishments or other judgments (i.e., evictions). Again make sure to check this section for accuracy. It’s important to realize that negative marks on your credit are not permanent. Most negative marks are only allowed to be reported for 7-10 years after which the credit bureaus are required by law to eliminate them from your report.

Inquiries: In this section, you’ll see a list of anyone that has requested to view your credit information. These inquiries will be split into two categories often called a hard check and a soft check. A hard check occurs when a creditor checks your credit as part of an application. This type of inquiry will show on your credit when viewed by potential creditors and can factor into your credit score. A soft check often happens when a company pre-approves you for an offer or an employer checks your credit. These are only shown to you and will not impact your score.

Step 3: Correct Any Inaccuracies You Find

Reviewing all the information on your report regularly is very important to ensure that the information is an accurate picture of your use of credit. Sometimes items show up that are either not your accounts or are simply not reported correctly. Whether the error is due to identity theft, fraud, or an honest mistake, you’ll want to take quick steps to correct it by submitting a dispute to have the information removed or corrected. For more information on how to submit a credit dispute, go here. If you feel you are the victim of identity theft or fraud, go here to find a step by step guide to help you report and resolve the problem.

Knowing what is in your credit report is an essential part of protecting your identity; it is also the first step to improving your credit score. In the next post we’ll focus on how this information is used to calculate your credit score and what you can do to improve your score.

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