The following is a guest post by Mike Brains from Financial Facts, a site for “facts and advice on all things financial”. He shares some surprising (well shocking to me anyway!) information about credit reports that I didn’t know.
You may think your mother or your spouse are the people who know the most about you, but in reality your credit report may know even more than that. Before you apply for that credit card, personal loan or a mortgage it is essential to know exactly what is involved with a credit report. Waiting until you are applying for credit is not the time to be surprised about what shows up. Take some time now to review this information to make sure it is correct to minimize any problems in the future.
Your credit report will contain the following information:
Identifying information: this will include your name and any aliases including married names; your current and previous addresses; your social security number; your birth date and past employers. Information about your spouse can also be included. Especially in cases of divorce, it is a good idea to check that this information is both current and correct.
- Credit information: unfortunately, it is not uncommon to find major errors in this type of information on a credit report. Items appearing on your credit report will include information from banks; retailers; utility companies; credit card issuers and other lenders. Student loans, mortgages and co-signers will also show up on a credit report. The overall picture will present a clear payment pattern potential lenders need in order to grant more credit.
- Public record: this data is compiled from materials that are a matter of public record such as bankruptcies, tax liens and monetary judgments.
- Recent inquiries: credit reports will also list recent inquiries on your account for the past year, two years if the enquires are for employment purposes.
Although most of this information is beyond your control, if there is a discrepancy you can contact the credit reporting agency for a correction. It is imperative to check what appears on your credit report and determine if everything showing up is correct and current. In this case, being proactive with your credit report will save you from any unnerving surprises when applying for a new loan. Knowing what information is included on a credit report is the first step to verify it is in good shape and remains that
way.
Youngandthrifty’s two cents: The main thing I knew would be on a credit report are recent inquiries. Inquiries are generated when you apply for new credit cards, for example. I know that if you go over a certain number of credit report inquiries a year (I believe the magic number is about four a year), it is red flagged and your credit score may go down because of the frequent “credit checks”. It’s always important to keep your credit score in good standing, because you never know (knock on wood) when you might need to borrow money (e.g. your car breaks down or is totaled in a car accident and you need to get another one). The only time I ever checked my credit score was when I was applying for the mortgage. I probably should have checked the credit score more than I did … and I should have looked into canceling the dormant credit cards I have from 10 years ago but never got around to canceling.
My biggest surprise was that my credit limit on the most used credit card wasn’t reported! When this card’s spending limit was removed, I didn’t think there would be a side effect, albeit a negative one!
@MoneyCone- That’s weird..! How come they did that?
I’ve heard that if you have a really old credit card that you don’t use, you should not cancel it. Because that reduces your credit history by a lot. So keep those old credit cards on there cuz then you’ll have a longer credit history for someone to look at and give you a better deal.
CreditKarma.com is an easy, free way to check your credit score (at least in the US. I don’t know what Canada uses). I use it every month.
@Kevin @Thousandaire- Thanks! I’ll check it out this summer. I don’t think I’ve checked out my credit score at all yet this year.
I’m pretty sure they will cancel the card if there are no activities for a long time. You don’t want to actively cancel a card, I think it has a small negative impact on your credit score if you do that.
@retirebyforty- Hmm yes, that sounds like what Etienne says. Thanks RB40!
I’ve been working on improving my score so I’ve been checking mine more frequently. Last year I probably checked it twice. This year I’ve already checked it twice as well (but one of the times I was also writing a review article on a credit site and needed the research)! As for closing old cards, the older the credit history, the better. If the cards aren’t costing you anything, just keep them.
@Little House- It’s recommended to check it once a year, right? I guess it’s like the “annual physical exam” at the doctors, except we’re checking our financial health in a way
These days banks are fairly understanding when people are shopping around for mortgages. If you end up with multiple credit checks all within a week or two, they are now considered as a group, because you’re obviously shopping around for a good deal. That way, they get counted as ‘one’ and don’t make a negative mark against your credit.
@Michelle Prosek- That’s also good to know, thanks! I think the banker did tell us that, but I didn’t believe her (my natural skepticism took over me). Good to hear it coming from an unbiased source.
after 7 years without activity, it is removed from the list, closed or not, so it’s not true that keeping 10 year old cards will “help” or even “show” on the report. The report keeps them 7 years after date of last activity.
Also, if you close your credit cards/accounts, it does not always affect the score in the same direction, it can raise or lower your score depending on other factors:
- If you have 100 000$ available on multiple cards/line of credit and you owe 10 000$ total on one of them… if you close a few and have only 30 000$ total credit limit afterwards, it will lower your available credit to 30 000$ (higher score) but increase your debt ratio to 30% (lower score), in this case, the good outweighs the bad. But if you have 20 000$ available credit and 10 000$ credit used, and you close a few cards to have only 10 000$ max credit, you would have a very high ratio of 100% (lower score) and a little lower limit to 10 000$ (good), in this case, the very high debt ratio would hinder your score much more than reducing the available total credit.
It all depends on your particular case.
Also, closing an account simply indicates “closed at customer’s request” on the notes of the credit score. The rest of the informaiton is not changed at all. So it’s ok to close account as long as you keep an ok ratio. The account being closed will not be calculated in you available credit.
And to choose which cards to cancel, if you have an old one with 7 years of good credit, you keep it there, but the other MBNA cards you have used only for 15 months, you can remove them.. You want the longest history, so a 15 months credit card is useless for that.
Here is an interesting read: http://www.fool.com/personal-finance/credit/5-ways-to-ruin-your-credit.aspx
they say to keep around 10% to max 30% debt to available credit ratio.
After 50% it’s a red flag.
@Etienne- Thanks so much Etienne for sharing your knowledge. That Motley Fool read was really good, thanks. I had heard that it was the debt to available credit ratio that they care about- but didn’t know the specifics.
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I wish there was a free way in Canada to check your credit score. I’ve ordered credit reports from TransUnion and Equifax (for free) a few times but to get your score you have to pay. It’s $15 bucks for each company, and I’d probably want to buy both to compare. Anyone know of a better way to go about doing this?
@Obsessive Compulsive Daniela- Hmm how about pretending to shop for a mortgage?
[...] to a credit report, than just your FICO score. Mike (guest post) over at Young&Thrifty blogs; “What your Credit Report Knows that You may Not“. Save your self from suprises, be proactive, take out your credit report on regular basis [...]