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Consumer Guide to Credit Reports – Part 1

While free and easy to acquire, many Americans still fail to request credit reports each year. Consumers can pull up to three free credit reports per year – one from each of the three major credit reporting agencies. Creditors analyze credit reports to determine whether to extend credit and on what terms to prospective consumers. Consumers who regularly review their credit reports are not only able to detect fraudulent or incorrect information, they are also able adjust their behavior to maintain financial stability and viability now and in the future.

Credit reports contain financial information that is displayed in a specialized, and somewhat confusing, way. Typically a free annual report does not contain a credit score. Rather it contains a history of one’s debts and repayment practices. Professionals with training and experience in reviewing credit reports can help you to understand the important content, as well as counsel you on how to improve your credit by modifying your financial habits.

In this multi-part series, we’ll cover what a credit report is used for, why it should be periodically reviewed for accuracy, how to review one, how to deal with fraudulent transactions or accounts, explain debt-to-credit ratios, the different types of credit inquiries, healthy credit habits, how to handle credit collections and rebuilding credit after bankruptcy. Ok, let’s get started.

What is a Credit Report used for?

A credit report is simply a record of a consumer’s past borrowing and repayment history. When a consumer fills out a credit application (mortgage loans, car loans, credit cards, and the like), the individual’s s information is sent to a Credit Bureau. There are three credit bureaus: Experian, Equifax, and TransUnion.  Each compiles your credit information and history. However, they use proprietary algorithms or calculations to determine an individual’s credit worthiness. They look at your borrowing and repayment practices, and calculate the likelihood (or risk) that a you will repay the debts as promised.

When a lender pulls and analyzes a consumer’s credit report, they typically review current income as well as several other factors to determine whether to extend credit and on what terms. Lenders’ policies vary, and credit terms factor in level of income and ability to repay the debt on time. Information contained on your credit report will be used to determine annual percentage rate, grace period, fees/penalties, etc.  In essence, a credit report is a reflection on how a consumer manages their financial affairs.

Next up: 3 reasons why you should periodically review your credit report.


About Sean Hanley

Practicing law since 2007, Sean specializes in the ever-changing laws related to real estate, business and estate planning. Embracing technology with a focus on personalized service, he understands the challenges of living and thriving in Silicon Valley. Tapping into his education in economics and business administration, Sean also serves on the non-profit Willow Glen Business Association.

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