Understanding Your Credit

Understanding how credit works will help you obtain a good credit score and help you reach your financial goals. The first thing to know is that your creditors report to credit bureaus. The information they report includes:

  • Missed or late payments
  • Collections (when your debt is sold to collection agencies)
  • Bankruptcy
  • Statements of dispute (more on that later)

Because these reports can be inaccurate, it is important to monitor your credit frequently. If you become the victim of credit fraud or identity theft, frequent checks will help you recover quickly.

Three Reports per Year

Thanks to FACTA (the Fair and Accurate Credit Transactions Act), you are legally entitled to one free credit report from Experian, Equifax, and TransUnion each year. Your credit reports may vary slightly, but in general, the numbers should be pretty much the same. We suggest you request your credit report from one of the credit bureaus every four months.

For example:

  • January – TransUnion
  • May – Experian
  • September – Equifax

This is recommended because it allows you to see if your credit improvement techniques are working. It also allows you to check more often for fraud.

Your credit report is a comprehensive document, comprised of:

  • Your Identity (name, SS number, etc)
  • Your Types of Accounts (loans, debts, credit limits, etc)
  • Any Debts Sent to Collections
  • Your Consumer Statements (Statements of Dispute)
  • Your Hard and Soft Inquiries

Hard vs. Soft Credit Reports

A hard inquiry occurs when you apply for credit or loans. Technically, you don’t make the inquiry yourself – the lender does. For this type of inquiry, your permission is required.

A soft inquiry, on the other hand, is simply a check. You (or even a potential employer) may check your credit score just to see the number. Unlike a hard inquiry, a soft inquiry does not require your permission. Soft inquiries don’t affect your credit score, so you don’t have to worry about that.

What to Watch For

These are the things you need to watch out for on your credit report, especially if they’re false:

  • Any missed or late payments
  • The amount of credit you are using
  • Your various accounts
  • How old your accounts are