When you apply for a loan or a credit card, the lending companies will review your credit report to get a sense of how responsible you are as a borrower. Your credit report is based on your history of using credit — credit cards and loans — and how you made payments. If you kept your balances low on credit cards and made regular payments, you’ll have a better credit score. A higher credit score will help you qualify for loans and get lower interest rates.

Establishing a good credit history is a slow process. It can take several years of responsible money management to have a good score and prove your creditworthiness. So it’s important for you to know what factors appear on your credit report and how it affects your score.

What is a credit report?

A credit report is a written statement of your credit history of borrowing and bill payment, which determines whether you are a good risk — whether you are creditworthy. It lists any:

• Credit card accounts
• Loans (student, car or home)
• Lines of credit
• Unpaid bills
• Loan or credit card balances
• How regularly you make payments

It also shows if any action has been taken against you because of unpaid bills. Your credit report won’t show if earn $100,000 a year or have $100,000 in your checking account — it doesn’t know that information — it only knows what you have borrowed and whether you pay your bills on time.

A basic credit report also does not include your FICO (or other) credit score, which is a serious shortcoming since it's what many lenders rely most heavily on when deciding whether or not to grant you credit. When you go to check your credit report, you have to pay an extra fee to get your credit score.

You are entitled to one free credit report each year at:

• AnnualCreditReport.com: www.annualcreditreport.com

This site was set up by the three credit reporting agencies:

• Equifax: www.equifax.com
• TransUnion: www.transunion.com
• Experian: www.experian.com

We recommend that you stay away from any other credit reporting services and websites that you may hear advertised, especially those with the word “free” in the title. Your credit report is already free, by using the above site. And generally, they enroll you in automatic 30-day trial for a credit monitoring service that requires a monthly fee — and it can be a big hassle to cancel this service.

When should I check my credit report?

Check your credit report at least once a year to make sure that your identity hasn't been stolen and you aren't the victim of fraud. Your credit report is where you can get a summary of your accounts.

If you ever lose your wallet or learn that your personal or financial information has been compromised, immediately contact the three credit bureaus and put a fraud alert on your account:

• Equifax: www.equifax.com
• TransUnion: www.transunion.com
• Experian: www.experian.com

They also can help you if you find you’ve been a victim of identity theft or fraud.

We also recommend seeing a copy of your credit report before you apply for a loan for a car or home or a credit card in case there are any errors to report.

• AnnualCreditReport.com: www.annualcreditreport.com

How are credit reports gathered and used?

A consumer reporting agency (CRA) is a company that gathers credit information, stores it in a large database and sells it to subscribers who pay a monthly fee. Information in the credit report is then used as the basis for granting or denying credit.

Usually banks, retail businesses, employers, landlords and insurance companies will pay to see your credit report because they want to make sure you are financially responsible. Each subscriber then supplies information about its accounts with customers, such as names, addresses, balances, on-time payment record, etc.

The most common CRA is a credit bureau. Credit bureaus assemble and distribute detailed credit information concerning millions of people. Each time you use credit or make a payment, the subscriber records the information from the transaction. Once a month, they electronically transmits accumulated data about your borrowing and repayments to one of more of the three national credit bureaus. The credit bureau stores this information under your social security number for identification.

How do you get a credit report?

There are three major credit bureaus that operate nationally:

• Equifax: www.equifax.com
• TransUnion: www.transunion.com
• Experian: www.experian.com

You’re entitled to one free report every year.

How can I improve my credit report?

If you apply for a credit card or loan and the lender denies you credit, the lender must give you the name, address and telephone number of the credit bureau that provided the credit report.

At that point, you have up to 60 days to request a free report. Remember, negative information is removed from your credit report after seven years, except for bankruptcy, which remains for 10 years.

If there is an error on your credit report, contact the financial institution, business or creditor that put the error on your credit report and try to correct the problem directly with the them in order to remove the error from your report as quickly as possible.

If necessary, follow the dispute process of each of the three national credit bureaus and provide them with all necessary details and documentation to backup your claim or dispute. Credit bureaus should investigate all claims within 30 days of notification.

Words to know

Unsure about something you read? Many of the financial terms you came across in this article are defined in our financial glossary. A-Z Glossary

Links we like

Here are a couple online features you might find useful:

• AnnualCreditReport.com: www.annualcreditreport.com
• Equifax: www.equifax.com
• TransUnion: www.transunion.com
• Experian: www.experian.com