Use these five steps to check your credit report and help increase your credit score
Your credit report is like a photo album of your financial life, a snapshot of your financial past. If you’re like me, you put your financial photo album on the shelf to collect dust just as you do those other photo albums.
But there’s a good reason to check your credit report regularly. Reading and understanding your credit report will help you see mistakes in the past and be able to increase your score. Checking your credit report will also help you catch identity theft quickly and keep it from ruining your financial life.
What is included in your Credit Report?
Your credit report includes personal information to identify you by address and previous addresses as well as your social security number. This is how the credit report companies track your financial history and make sure another persons' debts don’t go on your report.
Your credit report includes all your credit accounts like mortgages, student loans, credit cards and car loans. It provides information on your payment history as well as any payments missed. It also shows the number of times someone checked your credit over the past two years.
Since it’s attached to your social security number, your credit report should be fairly safe, right? Not quite, the Federal Trade Commission estimates that at least 5% of credit reports contain some kind of error like misreported debts or missed payments. Five percent may not seem like much until it happens to you and puts your credit score in the gutter.
Even if you don’t plan on taking out a loan, it’s a good idea to check your credit report and fix your credit score. A 30-year home mortgage for $250,000 will cost you $171,920 in interest on the current 3.85% for borrowers with good credit scores. Those with poor credit and an 8% rate will be looking at $410,388 in interest for the same loan, a difference of $238,468 over the life of the loan.
Check your Credit Report Step 1: Get your Free Annual Credit Report
It’s easy to get your credit report each year from annualcreditreport.com or by calling (877) 322-8228 to request your report by mail. The annual report from each of the three credit bureaus is mandated by law so it’s your right to get yours free.
If you’ve already gotten your free annual report but want to check your credit score, there are service providers that regularly run offers. I’ve used Experian to get my report and to monitor my score for identity theft. When you consider how expensive it can be if your identity gets stolen, something that happens every two seconds in America, it’s worth it to have a little insurance.
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Check your Credit Report Step 2: Understanding your Credit Report
Once you’ve got your credit report, it’s helpful to understand what factors affect your credit score. There are five factors that affect your credit score but some are more important than others.
- Payment history (35%) accounts for the biggest weight on your credit score. Make all your payments on time and your credit score will increase but miss a payment and your score will be lowered. Any bankruptcies, overlimit accounts or liens will also hurt your credit score.
- Total credit owed (30%) is also a big factor on your credit report and is measured by your debt-to-credit ratio. This is simply the amount of outstanding debt you owe divided by how much total credit you have. For example, if you charge $500 on a credit card with a limit of $5,000 then your debt-to-credit ratio is 10% (500/5,000). Keeping your credit balances low will help increase your credit score.
- Length of credit history (15%) is simply the amount of time you’ve had a credit score, usually from your first credit account. Not much you can do about this one.
- New credit accounts and inquiries (10%) is the number of accounts you’ve opened and the number of times someone has checked your credit. Constantly opening accounts or checking your credit can hurt your credit score because it looks like you’re scrambling for money.
- Types of credit (10%) is the easiest factor to manage on your credit report. Revolving credit, the kind that doesn’t have a payoff date like credit cards, hurts your credit score more than other types of credit. Non-revolving debt like mortgages, car loans and peer loans do not hit your score as hard.
Check your Credit Report Step 3: Check each Creditor
A new case of identity theft happens every two seconds in America. I was blown away when I saw that and immediately set my schedule to check my credit report every four months. You can repair your credit score after identity theft but you need to get on it as soon as possible.
The first thing you need to do is check every account on your credit report to make sure you recognize the creditor. It may be difficult to remember every account you’ve opened through the years but it’s all there for you on the credit report. Pay special attention to those accounts you don’t remember opening.
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Any credit cards or accounts you’ve closed should show on your credit report as well. This is a good way to make sure those accounts were actually closed by the company when you called instead of being left open.
Check your Credit Report Step 4: Check those Late Payments
Your credit report will have a helpful key of number of late payments over the last 48 months on each account, separated by payments 30-, 60- or 90-days late.
Since payment history is the biggest factor in determining your credit score, you really need to stay on top of this part. Make sure you check any missed payments on your credit report to make sure they were truly late.
A credit score hack I’ve used successfully in the past is contacting creditors to get late payment history removed from my report. If you’ve had the credit card or account for a long time and have only been late once or twice, the company might agree to remove the late payment mark from your credit report rather than see you close the account. It doesn’t work all the time but getting one late payment removed can really help increase your credit score.
Check your Credit Report Step 5: Check those Collections, Judgements and Liens
Most of the time if an account has been passed to a collection agency, you’ll know it – oh, you’ll know it every night. But there are instances where you might not hear about it and the more time it sits on your credit report, the lower your credit score will tumble.
Make sure you check all the accounts that have been sent to collections or any judgements against you. These will seriously hurt your credit score so it’s best to avoid them if you can but we all face financial trouble at some point.
If you are seriously behind on an account, try contacting the creditor and working out a payment plan. They might be able to lower your payments for a short period to help get you back on track. Selling the account to a collection agency will cost them money and they’d rather work with you than let it get to that.
Understanding how to check your credit report and regularly monitoring your credit score can go a long way to improving your score and getting better rates on loans. It actually doesn’t take as long as you might think and can help you move one step closer to financial freedom.
Want to increase your credit score? Check out the 21 steps to increase your credit score by Christmas.
About the Author
Joseph Hogue is a financial expert and investment analyst. After serving in the Marine Corps, he started his career investing in real estate before becoming an investment analyst for some of the largest private investors. He's appeared on Bloomberg and on CNBC as an investment expert and has published ten books in personal finance. Now he helps investors reach their financial goals and invest in the stock market with some of the same advice he used when working for the rich.