How to Analyze Credit Reports

Whether you are trying to get out of debt or are looking to avoid getting into it, the ability to analyze your credit report will get you started. By law, you are entitled to one free credit report per year from each of the three major credit bureaus – Experian, Equifax and TransUnion. Having a copy in your hands means little, however, if you don’t understand it. There are a number of things to look for — from address discrepancies to inquiries. Missing inaccuracies or previously unknown items can cause you headaches down the road.

Obtain a copy of your credit report online through AnnualCreditReport.com, which allows all U.S. residents to access each of their credit reports once in a calendar year.

Verify that your name and address are correct. Address discrepancies are a red flag for identity theft.

Look for fraud alerts. These appear below your name and address. If you ever called a credit bureau to report a fraud or a potential identity theft, it will appear in this section.

Review your credit score. The report will have three scores, one from each credit bureau. The way the scores are weighted varies, but typically a score of 750 and above is exceptional, 720 to 750 is above average, 660 to 720 is acceptable, 620 to 660 is uncertain and below 620 is high risk.

Read the notations next to the score. These explain the factors affecting it. Examples include “too many inquiries past 12 months,” and “too many accounts with balances.” This will give you an idea of what you need to correct to improve your score.

Review the “Public Records” section. Any judgments or tax liens against you will show up here. Check the status to make sure there are no paid liens showing as “open.”

Review each individual item. Look for outstanding balances and the monthly payments. Add up the total of all your monthly payments.

Divide the total of your monthly payments by your gross monthly income to determine your debt-to-income ratio. For example, if you make $2,000 in monthly payments on a $6,000 monthly salary, your debt-to-income ratio is 33 percent. Go above 40 percent debt-to-income and you will have trouble getting approved for credit.

Contact the credit bureau to address any discrepancies that may appear. It can take anywhere from 30 to 60 days for items to be removed from the report, so be sure to take action quickly.