Understanding Your Credit Report

If you're in the market for an auto loan, one of the first things you should do is take a look at your credit report. This document provides the data that goes into calculating your credit score; your credit score, in turn, plays a huge role in determining what interest rate lenders will charge on your loan and whether you'll be able to get a loan to begin with.

Awash in numbers and data, a credit report can look like gobbledygook to the uninitiated. Getting up to speed on how it works is clearly important. Let's unlock its secrets.

Your credit report is a document that comprehensively details your credit payment history. Ever owned a credit card? Or taken out a bank loan? If you have, it's likely that information regarding your account activity will be reflected on your report. But this sort of payment data isn't all that your report will contain. Typically, four types of information are reflected:

  1. Personal information. This includes your name, spouse's name, social security number, current and previous addresses, birth date and current and previous employers. This data is culled from your past credit applications, so its accuracy is dependent upon how completely and honestly you fill out forms each time you apply for credit.
  2. Credit information. Included is information regarding each of your accounts with banks, retailers, credit card issuers and/or other lenders. Credit limits as well as loan amounts and balances are detailed, along with payment patterns going back a few years.
  3. Public information. This includes bankruptcies, tax liens and monetary judgments, and, in some states, overdue child support.
  4. Inquiries. Included are the names of those who requested and obtained copies of your credit report.

Not all of this information remains on your credit report permanently.

  • Positive credit information will remain on your report indefinitely, although information about an account will fall off your report if nothing new is reported for seven years.
  • Negative credit information remains on your report for up to seven years after the date of the original delinquency.
  • The length of time for which a bankruptcy will dog your credit depends on the type of bankruptcy that you file. Chapters 7, 11 and 12 remain on your credit report for 10 years. If you file a Chapter 13 bankruptcy (under which all or part of all debts owed are repaid under a court-approved payment plan), it will be deleted from your report after seven years. All other public record information typically falls off after seven years.
  • Inquiries are typically cycled off your report after one to two years, depending on the type of inquiry.

There is, of course, some personal information that your credit report does not reveal. It doesn't reflect information about your race, religious preference, medical history, personal lifestyle, personal background, political preference or criminal record.

The following points shed some light on how lenders evaluate your report:

  • As one would expect, on-time payments are viewed as a plus by potential grantors of credit.
  • A low debt-to-income ratio (under 20 percent) is ideal. This ratio is calculated by dividing your total monthly debt (rent or mortgage payments plus credit card minimum payments plus loan payments and the like) by your total gross monthly income.
  • Lenders tend to frown upon those with too many credit cards. The available credit on these cards is viewed as being potential debt.
  • Late payments hurt your rating. The later the payment (whether 30, 60 or 90 days) the more of a negative it will be.
  • Frequent requests for additional loans or credit cards can count against you. If you've had more than four inquiries made within the past year, it will hurt your chances to get new credit.
  • Numerous changes in address and/or employment may also hurt your rating. Lenders like stability.
  • As one would expect, items like bankruptcies and charge-offs are viewed negatively.

If you find information that you believe to be incorrect in your credit report, you'll need to address it. Contact the credit bureau in writing, including documents that support your position. Make sure your letter lists your name and address. Clearly identify the item you believe to be invalid, explain why you think it is erroneous and request its deletion. The credit agency must reinvestigate disputed items, usually within 30 days. The law states that erroneous information, or disputed information that the credit bureau is unable to verify, must be deleted from your file.

You're probably wondering how get a copy of your report. It may be ordered from any of the three credit bureaus — Experian, Trans Union and Equifax.

Remember, forewarned is forearmed. Even if you're not currently hunting for a car loan, it's a good idea to take a look at your credit report now. That way, problems can be addressed before they have a chance to hurt your prospects.