Trying to understand a credit report and credit scores can be a daunting task. Credit reports contain and credit scores represent a plethora of information, but figuring out how that information helps or hurts you isn’t easy. Even more difficult is trying to determine what changes you can make that will benefit your credit reports and scores.
In the United States, three reporting agencies prepare credit reports: Experian, Equifax, and TransUnion. Each of these reports usually include personal information (name, date of birth, SSN, addresses, employment history), details about accounts, and details about inquiries.
In the credit world, you’re a “borrower” and the companies that give you credit cards and loans are “creditors.” Account details on your credit report are typically reported by the creditors on a monthly basis to each of the reporting agencies. Each account lists information, such as when the account was opened, the current balance, balance history, credit limit, and payment history. Delinquent accounts, usually sold to collection agencies, can also appear on the report and might include things like unpaid medical or utility bills. Bankruptcies, liens, and foreclosures likewise appear on the report.
Inquiry details include any time a business gets some information about you from the reporting agency. There are two primary types of inquiries: “soft pulls” and “hard pulls.”
A hard pull (also called a regular inquiry) occurs when you explicitly grant permission to an entity to check your credit for the purpose of establishing a new credit account, such as a credit card or loan. These accounts, if successfully established, eventually appear on your credit report. Non-creditor entities may have a reason to conduct a hard pull, such as when applying to rent an apartment or house, establishing new service with a cell-phone company or utility, or getting car insurance. With a hard pull, the entity that you permit to do so gets a significant amount of information from your credit report. Hard pulls end up having a negative impact on your credit score that is both temporary and minor, but too many of them in a short amount of time may act as a red flag.
A soft pull (also called a promotional inquiry) occurs when entities check your credit without getting your explicit permission. This is usually done so they can send you promotional offers. Any time you’ve gotten a letter stating you’re pre-approved for something, a soft pull likely preceded it. Soft pulls don’t impact your credit score.
There are other types of inquiries, such as account reviews. Account-review inquiries are similar to soft pulls, but are for creditors with which you already engage in business. For example, if you already have a credit card with a bank, the bank might occasionally view details about your credit report in order to assess whether to increase your credit limit. Like soft pulls, these don’t have an impact on your credit score.
Some information on your credit report is eventually removed once enough time passes. We often call this “falling off.” Closed accounts and bankruptcies typically fall off your credit report no earlier than seven years and no more than 10 years after the event. Hard pulls typically fall off after two years.
Importantly, information on all three credit reports may not be identical. The agencies are competitors and don’t share information with each othe. Some personal information may have been reported to only one or two agencies or the agency may opt not to store it. Some agencies retain a longer account history than others. When your credit is pulled, the company that pulls it may opt to pull only from one or two agencies, so those inquiries show up only on certain reports.
A credit score is a number, based on the information in your credit report, meant to represent how responsible you are. Although there are various unofficial credit scores, including those provided by the credit-reporting agencies themselves, when people say credit score, they usually mean FICO score, VantageScore, or a score provided by the credit-reporting company. There are several different versions of these scores. The commonly used FICO 8 score ranges from 300 to 850. Other versions and types of credit scores may have different ranges, even capping out at 999. Typically, a high score is considered better, with 700+ being good and 800+ exceptional on most scoring models.
Though your credit report might be free of late payments, negative remarks, or hard pulls, you may not have a good credit score. Why not? You might have been doing some things that don’t seem bad, but are inadvertently hurting your score.
Having a good credit report and high credit score will ultimately make it more likely that you’ll qualify for: more credit cards, better offers for credit cards, higher credit limits, lower interest rates on loans, and — perhaps surprisingly — better rates on car insurance!
In upcoming posts, I’ll discuss how you can view your credit report from each agency and monitor it on an ongoing basis, facts and myths related to your credit score, and the steps you can take to improve it.
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Credit report issues: Kevin, that may have been the case 15 years ago but times have changed and credit bureaus, although far from perfect, have more oversight than ever. If you dispute a charge, the person/company who makes the claim has to provide proof of why the charge is valid. In the meantime, that occurrence is not considered on your credit score/report. I have successfully fought a couple of erroneous remarks on my credit report, one from a utility and one from a doctor. In both cases, I prevailed based on the documentation I provided.
It is true that a credit report can influence many different aspects of your life ( jobs, insurance, etc) but it isn’t fair to say that once a mistake shows up on your credit report, there is nothing you can do about it.
To Kevin Lewis: Let’s assume you are talking about a collection agency. There is a filter of sorts in that the credit reporting agencies do have lists of places from which they will and won’t accept reports of debts. Failed to pay a federal student loan? Each agency will take that report. Buy something from a scummy company that is known to keep billing you even after you cancel a subscription? There could have been enough people disputing those charges in the past that they will no longer accept data from them.
I have known people who have gotten mailed letters from collection agencies, both for valid and invalid debts. Sometimes when they check their credit reports it does NOT show up on there because the company is less-than-honest and the credit reporting agencies won’t accept the debt.