Rabbi Shloimy Stern wanted to buy a house. Apparently, in order to do so he needed to learn the sugya of credit. At an event for first-time homebuyers, bank representatives kept referring to credit reports and scores as if these were something everyone was familiar with. Which he wasn’t. Since these financial records influenced who got what type of mortgage, it was clearly important for him to educate himself about them—what they were, how they operated, and how he could review his.

What’s the basic 101 of credit reports? Why do they matter and how do you manage them?

The Financial Report Card

Credit reports are like personal financial report cards that track people’s financial trustworthiness. In the olden days, when most people lived in small towns, the trust required for lending was primarily direct and personal. But trust in modern banking between strangers is built around a credit-reporting system. Prospective lenders access credit reports to learn things like how much debt a prospective borrower has currently and how reliably they’ve managed debt and other financial obligations in the past. This information from the current and present enables them to gauge how safe or risky it is to lend to a particular individual going forward.

Credit Agencies—Meet the Three Biggies

The three main credit-reporting agencies, TransUnion, Equifax, and Experian, do basically the same thing. Most American adults have a file with each agency, beginning with their name, birth date, social security number, and associated addresses. Next, the report keeps track of relevant public information—bankruptcies, tax liens, legal judgments, etc. Finally, major lenders, including banks, credit card companies, auto lenders, and collection agencies, etc., send updated files of all their loans and outstanding bills to the credit agencies. As people borrow, repay, and close down loan accounts, or if they don’t make their required payments on time, credit agencies input this information to their massive databases.

Getting a Bad Rap

When you apply for a mortgage, car loan, credit card, or even utility service, your credit report will be accessed for hints about your financial credibility. If you have a spotty credit file, they may deny the loan or decide to charge a much higher rate. The information in your credit report can also influence whether you’ll get a specific job, be able to rent an apartment, and even raise your car insurance rates. In the absence of personal knowledge, companies count on your history of managing financial commitments to decide whether to do business with you and on what terms.

Credit Scores—The Borrower’s Numerical Grade

One very important derivative of a credit report is the credit score. A credit score boils down all the information within a credit report down to just one number. The best known of these financial grades, a FICO score, ranges between 300–850, the higher digits, the stronger. To get a mortgage, for example, a lender may require a minimum FICO score of 600, with their best rates reserved for those scoring over 740. There are strategies to quickly improve a credit score but simply paying your bills on time has the most influence on that vital number.

Why is Monitoring Credit Important?

It’s a bit creepy—no, very creepy—that everything we do today is tracked by huge faceless corporations. Worse, errors can arise within credit reports, leading to faulty credit scores and even missed financial opportunities. And those vast troves of data are ripe targets for hacks and fraud. In 2017, Equifax was hacked, exposing the personal data of most American adults! And in 2020, Experian was hacked too, albeit on a somewhat smaller scale. It’s important to be proactive about managing and monitoring your credit reports. You definitely don’t want the first notice of a problem being a rejection of your mortgage application!

Accessing Your Credit Reports—For Free

The good news though is that every credit agency is required to provide a free copy of your credit report annually, upon request—visit annualcreditreport.com or call 877-322-8228. Since the three main agencies’ reports are usually pretty similar, you can request one report from another agency every four months to keep a pretty tight handle on your financial profile. If you’re ever rejected for new credit, you are again entitled to free credit reports. The rejecting institution is also obligated to explain which negative credit aspects triggered the rejection. Note that the free offers do not cover credit scores; getting those are easy but will cost a few dollars.

Managing Credit Report Bugs

What happens if you do find an error on a credit report? Maybe a database upload confused you with a borrower with a similar name, or a bill was indeed paid but the lender or company did not update their records. You can contest any portion of your report directly by contacting the agency. They are required by law to investigate each claim in a timely fashion at no cost and respond in writing to the inquirer. If an error has been made, the agency must correct it and provide another free copy of the report.

Going Direct and Explanations

Sometimes, a better option is to contact the reporting lender or provider directly, providing proof of payment, etc. They are also obligated by law to respond to such inquiries. Either way, make sure to keep records of who you spoke to, and when, in case things need to be escalated to a manager or even an attorney down the line. One interesting final option is adding a brief note to your report, explaining extenuating circumstances for a negative item. For example, you can clarify that some late payments were the result of an illness. Or perhaps a vendor mischarged you and refused to resolve the issue. This may help for borderline cases.

It’s a Big Sugya

Credit is such a big part of personal finance and there is much to learn about. How to build your credit report from scratch? How to rebuild credit after bankruptcy? How to earn and keep a great score? Are credit monitoring services worthwhile? We hope to revisit these and other related topics in future columns.