How to Read a Credit Report to Find the Red Flags

Know what’s on your credit report. Check your credit report. Have you seen your credit report? It seems someone is always suggesting a deep dive into our credit reports.

But do you actually know what that means? Do you even know how to read a credit report? If not, it’s time to learn so that you understand your financial standing. The credit report, which leads to a credit score, is what dictates the amount of money you can borrow and at what interest rate. This affects your large purchases — house, car, boat, etc.

The first step is understanding the basics of elements of a credit report so you can find the red flags.

There are three primary credit reporting agencies: Experian, Equifax and TransUnion. These companies keep track of the loans you’ve taken out and how you are doing on payments. Based on this information, they issue a three-number score. You want to get higher than 670, possibly over 700. Read more about what your credit score means.

How to Read a Credit Report

You know why your credit report is important. But what you might not know is how to decipher the credit report itself.

So, let’s start here.

The credit report consists of five elements: personal information, credit history, credit inquiries, public records, and the credit score.

In general, you should be checking the credit report for red flags or errors. These red flags can range from incorrect information like a bad Social Security number or fraudulent activity such as credit card opened in your name that you never applied for. Incorrect data on your credit report can hurt your financial reputation. A better understanding of your credit report — and what should and should not be there — can help you catch errors that may impact your financial health.

If you’ve ever been affected by incorrect information on your credit report you’re not alone. At least one in five people have an error on at least one of their credit reports, according to a study conducted by the Federal Trade Commission.

Check out what a bogus charge sent to a debt collector did to one woman’s credit report.

How do Incorrect Credit Scores Happen?

When you apply for a loan, request an increase on your credit limit or even apply for a new job, your credit report will likely come into play. These are the reports that companies and institutions use to verify your credit history and ability to qualify for everything from loans to jobs.

So how do the errors happen in the first place? Some may be the fault of the individual while some point to mix ups in the volume of data that credit reporting agencies handle on a monthly basis.

Each of the major bureaus has more than 200 million credit files to maintain, resulting in more than 1 billion pieces of data updates per month, according to the Brookings Institute. With that amount of data it’s no secret why errors may occur.

However, maintaining an accurate credit report falls on the individual’s shoulders. Making sure your credit report is correct will ensure you get the best loan rate for large purchases and the best credit card rates, too. You can check your credit reports each year at annualcreditreport.com free of charge.

The Elements of a Credit Report

Let’s break down what each of the credit report parts are and what red flags to look for:

Personal Information

This is the basics of who you are as a borrower. This information will include biographical data like your name, date of birth, address and your past few years of employment and how much income you earn. It’s important to verify all of this information, especially your employment and income information. Often this information is factored into your worthiness to borrow and repay on time.

Red flags to look for: It’s all about the basics here. Is your address right? Is your last name spelled correctly? There’s also the chance for fraudulent activity here. Be sure no one has added statements to your credit report proclaiming inaccurate information about you.

Credit History and Accounts

In this section of your credit report, you’ll find the “types” of credit accounts you have. Generally they fall into three categories: mortgage, auto loan and credit card. Also included will be when you opened the account, the amount, balance owed, and payment history.

Accounts will either show in “good standing” or “negative.” This may seem simple and plain, but it’s still a good idea to check to make sure those “good standing” accounts reflect accurate payment history.

Red flags to look for: Make sure payments are showing up on the correct date and don’t reflect late payments. This can negatively affect your score. In fact, the Credit History portion of your report contributes to the majority of your credit score (more on that later.)

Credit Inquiries

Whenever you apply for a line of credit or loan, the lender accesses your credit report, which is considered an “inquiry” or “pull.” Some of these inquiries have more impact than others. Inquiries are generally classified as “hard” or “soft.”

A hard pull is done when a creditor or lender is accessing your report because you have applied for something specifically. A “soft” pull is generally done when a creditor or lender is attempting to “pre-approve” you for a credit card or loan offer.

Red flags to look for: It’s always a good idea to see just who is accessing your report. Are the hard inquiries, in fact, requests initiated by you? If you see a business accessing your report that you know you haven’t contacted, be sure to contact the credit reporting agency and notify them of this activity. The good news is you can see who is accessing your report, including the date of inquiry, name of creditor and type of business.

Public Records

Did you know more than credit and loan account information can appear on your credit report?

Public record information, including child support orders, tax liens, and bankruptcies can appear on your credit report. That is because credit reporting bureaus access public records information from the state and local courts.

Also any debt you haven’t paid that is in collections will appear on your report and could become a judgement filed with the courts.

Red flags to look for: If you have negative records like a judgment or bankruptcy, be sure it doesn’t remain on your report longer than required. For example, most negative or delinquent accounts should only remain on your report for seven years. Be sure to set a reminder when to check your report to ensure negative information comes off when it should.

Credit Score

This is the fifth and perhaps one of the most important aspects of your credit report. Each of the major credit reporting bureaus determines their own score for you based on various weighted elements of your report.

In general, the length of credit history, payment history, how much you owe on each account, new inquiries and the types of credit accounts are what’s used to determine your credit score.

Red flags to look for: If your score is lower than you expect or has changed drastically without any new accounts or changes to existing accounts, it’s a good idea to check your credit report for inaccuracies. This could be the first sign that something is wrong.

Contributor Nicole Hutcheon is a veteran journalist whose work has appeared in Ebony Magazine, 83 Degrees Media, Tampa Bay Times, Richmond Times-Dispatch, and Florida Designers Review. 

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