How to Read Your Credit Report and Understand What it Means

Your credit report is one of the most important pieces of financial information about you. It's a record of your credit history that includes information about your credit accounts, your payment history, and any derogatory items that may be reported about you. Reading your credit report is a good way to stay on top of your credit health and make sure that there are no errors or inaccuracies.

Your credit report is important because it is used to calculate your credit score. Your credit score is a number that lenders use to decide whether to give you a loan and how much interest to charge you. A high credit score means you're a low-risk borrower, which could lead to a lower interest rate on a loan. A low credit score could lead to a higher interest rate and could mean you won't be approved for a loan at all.

There are three major credit reporting agencies in the United States: Equifax, Experian, and TransUnion. You are entitled to one free credit report from each of these agencies every year.

Now, on to why you're here!

Here's how to read your credit report and understand what it means:

1. Check for errors. Carefully review your credit report for any errors. If you find any, dispute them with the credit bureau by mail only. You don't want to leave your dispute up to a computer. Mail in your dispute to ensure a human reviews your request. Remember, NEGATIVE info does not mean to dispute. You can only dispute true errors. TIP: if you're using a credit repair agency who is telling you to dispute everything negative in your report...RUN fast...don't pass go...don't collect $200. To dispute non-errors is a great way to secure a lasting commission for the credit repair agent because as soon as it's time to report that account again by your creditor, the negative/non-error will be right back on your credit report, as it should.

2. Look at your payment history. Your payment history is a record of whether you've made your payments on time. It's the most important factor in your credit score (it weighs 35% of your credit score), so it's important to keep track of your payment history. TIP: if you can't pay the bill on its original due date, call the creditor and ask the due date to be moved to a later date when you are confident the bill can be paid.

3. Check your credit utilization ratio. Your credit utilization ratio measures how much of your available credit are you actually using (weighs 30% of your credit score). Let's say that you have a $1,000 credit limit and you use every penny of it. When the creditor reports your account status to the bureaus, it'll show a 100% usage. Now, some people will argue that they "pay off their full credit card bill every month" and that's a great habit to have, but what good is that doing for your credit utilization ratio if it's always being reported that you're using 100% of your available credit. Think about what that might say to a potential lender... you're more than likely using all of your earned income PLUS you're using all of the credit you have access to...hmmm... doesn't sound so great now, does it? If you're already using up all of the available resources you have now, you're probably ONE life event away from being completely under water and when that happens, somebody isn't going to be paid. What are the chances of someone lending a significant amount of money in this situation? Probably very slim but you have full control over what your credit utilization ration shows. TIP: contact your credit card company, ask what date they submit your account status to the credit bureaus (and which credit bureaus do they report to TML) and adjust when you pay your bill. Pay the bill down BEFORE the report date to less than 10% of your available credit, this guarantees that your credit utilization ratio stays below 10% - regardless of how much you actually used. Then, immediately after the report date, pay the remaining balance. This way, you're still paying your credit bill in full every month BUT now you're making the credit usage work in your favor!

4. Check your account information. This section includes information on all of the credit accounts you have. It includes the account type, the date the account was opened, the credit limit or loan amount, the account balance, and your payment history. This section can help you understand your spending habits and see where you may need to make changes. TIP: make sure all of the account open/close dates are correct, as this affects your length of history (weighs 15% of your credit score), credit mix (weighs 10% of your credit score) and new credit accounts (weighs 10% of your credit score).

Bonus TIP: always make sure your personal contact information is up-to-date. If it shows five different addresses in less than two years...does that sound like someone who is stable? Maybe not. Also, don't forget about missing positive information. Not every creditor reports your account status every month and not every creditor reports your account status to all three major credit bureaus. This is especially important if you are seeking a new loan!

A credit report is an important tool that can help you understand your financial health. By reading and understanding your credit report, you can make informed decisions about your money. You should now have a better understanding of how to read your credit report and what the information contained therein means. Use this knowledge to help you make informed financial decisions and maintain a good credit score.

Challenge: When was the last time you checked your credit report? Take this free 4 day challenge and use the Credit Review Checklist to help you. Let me know how you feel about reviewing your credit report in the comments with an emoji.