Credit reports can look overwhelming. They’re often loaded with all kinds of information, from dollar amounts and company names to strange abbreviations and unfamiliar terms. That’s why it’s important to spend a little time learning about how they work and what they include, along with what they don’t.
These reports describe your history as a borrower and include details such as payment history, current balances and unpaid debts.
It’s important to recognize that only certain types of accounts are monitored by credit reporting agencies, including credit cards; installment loans repaid at a fixed amount over a predetermined period of time, such as auto loans, student loans or mortgages; and retail accounts such as store credit cards.
Each credit bureau presents the information differently, but any report should contain the following data:
Check out our sample credit report to get a better understanding of credit reports and how to read them.
From credit cards and mortgages to student loans and more, many creditors report your monthly payment history to one or more of the big three credit bureaus. Getting more than 30 days behind on these major monthly payments can drag down your credit scores.
There are different categories of late payments based on how recent they are, how severe they are and how often they occur. Creditors typically report late payments once a balance is 30 days late.
Paying your mortgage or a credit card bill outside of a standard “grace period” might incur penalties and fees, but it isn’t typically truly “late” until the 30-day mark. Understand, though, that what’s common isn’t always universal. Some lenders and creditors may not give you that grace period, meaning it’s possible to get hit with a 30-day late payment even if you’re just a week or two late.
There are additional late categories for 60, 90, 120 and 150 days, each of which tends to inflict a higher degree of damage to your scores. Once you get beyond 180 days, creditors may “charge-off” the debt or send it to a collection agency or both. Those can also hurt your score and in some cases even keep you from landing a home loan.
Items and issues that may be hurting your score are often grouped together in credit reports. Collections and public records are two common trouble spots. Once you become seriously delinquent on an account, a creditor may decide to involve a debt collection agency. Having credit accounts in collections can harm your score. In addition, mortgage lenders may have a cap on how much “derogatory credit” you can have, and amounts owed in collections will often count toward that limit.
Creditors can also “charge-off” your bad debt if they determine repayment is unlikely. Writing off the debt as a loss is an accounting move for the creditor. But it doesn’t mean you’re suddenly in the clear. In fact, creditors will often sell the charged-off debt to a collections agency. Charged-off accounts can also appear on your credit report and hurt your score. Mortgage lenders can take differing approaches to charge-offs. Some lenders may count charge-offs toward their cap on derogatory credit, while others ignore them all together in some cases.
The public records section of your credit report lists information gleaned from court records and other public documents, including bankruptcies, foreclosures, judgments and liens. Each of these can wreak havoc on your credit score. They can also each keep prospective buyers from being able to close on a home loan.
Depending on the specifics, prospective buyers who’ve experienced a bankruptcy, foreclosure or short sale may need to wait a certain number of years before being able to obtain a home loan. Court judgments will typically need to be satisfied before you can close on a home loan. The same may be true with liens, although in some cases having a solid history of on-time payments as part of a repayment plan can satisfy lenders.
Keep a careful eye on your credit report. Errors and faulty information can find their way onto anyone’s credit report, and those mistakes could knock you out of contention for a VA loan. The best way to monitor your credit is with a periodic review of your credit report.
There’s a host of credit monitoring tools and websites that offer a look at your credit score. But many of them require you to purchase credit monitoring or hand over other personal information. You can avoid that hassle and obtain truly free copies of your reports from a credit clearinghouse created by federal legislation.
Under the Fair Credit Reporting Act, every U.S. citizen has the right to obtain a free credit report from each of the three major credit reporting bureaus (Equifax, Experian and TransUnion) once a year. To obtain a free copy of your credit report, visit Annual Credit Report.com. There are a couple different approaches to consider.
You may order your reports from each of the three nationwide credit reporting companies at the same time, or you can order your report from each of the companies one at a time. The law allows you to order one free copy of your report from each of the nationwide credit reporting companies every 12 months.
That’s why some consumers prefer to space out their requests and order a free report from one credit bureau every four months, which provides a window into your credit throughout the calendar year.
If you pay for most things in cash, you may be one of FICO’s estimated 53 million Americans without a credit profile. Certain companies do not report regular activity to credit reporting agencies. It’s possible for you to have a variety of accounts in your name but not have a credit report or a credit score. That’s obviously going to be a problem for mortgage lenders.
Accounts that typically don’t show up on your credit report include cable, telephone and utility bills. Note that while these companies don’t report “regular activity” to credit reporting agencies, they could report an unpaid bill or a payment that is late by 30 days or more.
One important piece of information you won’t find on your free credit report is your credit score. Most companies require you to either pay a set fee or sign up for a monthly credit-monitoring service in exchange for a peek at your score.
It’s also important to know that lenders often see a different credit score than consumers, one that’s more weighted for mortgage-related factors. Consider your consumer-centric score a good representation of what a lender is likely to see, but don’t take it as gospel. Lenders can and often will see different scores when they pull your credit.
Your credit score will play a key role in the homebuying journey. Lenders will typically require you to meet a credit score benchmark to obtain preapproval and financing. Higher credit scores can also help you land a lower interest rate, which means a lower monthly payment and sometimes significant savings over the life of the loan.
Let’s take a closer look at the importance of credit scores and how they’re calculated.