What is a credit report?

Disclaimer: This article is not legal advice. Any legal information is not the same as legal advice, where an attorney applies the law to your specific circumstances, so you should consult an attorney if you’d like advice on your interpretation of this information or its accuracy. You may not rely on this article as legal advice, nor as an endorsement of any particular legal understanding.

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When you’re looking to buy a home or even just rent an apartment, landlords and rental agents will want to get to know you. But they’ll want to know more than just your name, or what type of property you’re interested in. They’ll need the details of your financial history so they can determine if you’re the right fit for the property. 

That means, you’ll likely be asked to provide a credit report and your credit score as part of the application process. Simply put, landlords want reassurance that they can trust you to pay rent consistently and on time. And lenders want to verify that you can actually manage and maintain accounts responsibly. 

But what exactly is a credit report, and how does your credit score impact your chances of securing your next home? 

What is a credit report?

A credit report is a detailed record of an individual's financial history encompassing details about their borrowing activities, outstanding debts, and other fiscal behavior such as payment patterns. It serves as a snapshot of their financial behavior, documenting information regarding their accounts, and providing a comprehensive overview of their credit card balances, loans, and mortgages. Lenders use credit reports to measure the level of your credit risk and how likely you are to pay your bills on time. 

While a credit report serves as a narrative of one's financial history, a credit score acts as a combined numerical representation that reflects a person’s creditworthiness. But it’s not just any numerical representation. A credit score is a three-digit number with a big financial impact. It can either open many doors for you (quite literally) or it can prevent you from securing your dream home. 

Essentially, a credit report offers a detailed storyline while a credit score delivers a succinct summary.

The key components of a credit report

Credit reports contain the following:

Personal information

At the top of a credit report you’ll find basic information about an individual, such as their legal name (and any name variations like nicknames, middle names or initials, along with surnames or maiden names), current and prior addresses, a Social Security number, their date of birth, their phone number, and their employment history. 

Account information

The second section features a detailed list of past and present credit accounts held by the individual. It includes both their revolving credit, such as credit cards and lines of credit, and installment credit, like personal loans, auto loans, and mortgages. 

Each entry shows the type of account, the current account balance, and the credit limit or amount. It also lists the individual’s account payment history including the date the account was opened and closed and, most importantly, if the individual kept up with payments. 

In some cases, it may not contain all your credit accounts, such as a closed account that has been removed after a certain period of time, or an account that a creditor hasn’t reported. 

Payment history

This section includes financial transactions that highlight the individual’s payment history, including all open loans and accounts, closed accounts, and any other credit-related activities. 

Open loans and accounts are active credit lines that provide an ongoing view of an individual's current financial obligations. Closed accounts, on the other hand, detail credit lines that were once active but have since been paid off or closed by the individual. 

Payment history offers insights into an individual’s credit limits, outstanding balances, and the status of each account. It exposes whether they are in good standing, have made late payments, or have any accounts that have been sent to collections agencies. 

Inquiries

In the inquiries section of the credit report, you can access a record of all the businesses or entities that have inquired about your credit report or credit score. These fall into one of two categories. “Soft” inquiries occur when you check your own credit reports, or when creditors conduct account reviews, or companies extend pre-approved offers of credit or insurance. And “hard” inquiries, which happen when you apply for credit or a creditor requests your credit report. Both types are retained on your credit report for up to two years.

While a soft inquiry is typically initiated for non-lending purposes, it does not impact a credit score. That means, you can routinely check your credit report so you can spot inaccurate information or look out for fraudulent activity that may indicate potential identity theft. 

But the same is not true for a hard inquiry. Although small and temporary, when a person applies for new credit, like a credit card, mortgage, or car loan, a hard inquiry can impact a credit score, causing it to dip by a few points. If multiple hard inquiries are made within a short period of time, lenders may get the impression that you might be in a cash bind. 

Public records

The public records section lists bankruptcies, tax liens, foreclosures, civil suits, and judgments. Public records have a substantial impact on an individual's creditworthiness and can negatively affect their ability to secure new credit or loans. For instance, a Chapter 7 bankruptcy can remain on a credit report for ten years, and a Chapter 13 bankruptcy for up to seven years. Tax liens, though, are removed from credit reports after they have been resolved or paid off. 

Who creates credit reports?

There are only three nationwide consumer reporting agencies (CRAs) in the U.S.—Equifax, Experian, and TransUnion—that compile and maintain credit reports. To formulate an individualized credit report, each of these credit bureaus gathers data from various sources, including lenders, creditors, and public records. With this information along with details on credit accounts, such as credit cards, mortgages, auto loans, and other forms of credit, the bureaus can generate an accurate representation of an individual's creditworthiness.

By combining all this data, in conjunction with evaluating an individual’s payment history and examining credit utilization (the amount of debt owed relative to credit limits) the credit bureaus can calculate an appropriate credit score. This value, which suggests how likely an individual will be to pay their bills in the future, aids lenders in their assessment of risk when extending credit. You may notice however, that each bureau’s credit score for you may differ slightly because not every lender or credit card company always reports to all three agencies. 

What role does a credit report play in buying a home?

Mortgage lenders want a full understanding of your credit usage—and rightly so. Lenders are making a significant financial commitment by extending a home loan and need to ensure that their clients have a reliable track record. 

A positive credit history suggests an individual is responsible enough to fulfill their financial obligations in a timely manner. But a poor credit history or a low credit score can be a red flag, indicating that they’re not a good candidate. It also signals that they may have a history of late payments or other financial challenges that could affect their ability to manage a mortgage effectively.

To protect themselves, lenders will pull a report compiled from data provided by all three bureaus known as a tri-merge report. This report helps lenders make more informed decisions when evaluating mortgage applications, ensuring they have a complete picture of the applicant's financial history. Alternatively, lenders may choose to request a residential mortgage credit report (or an RMCR) instead, which consists of only two reports from the three bureaus but usually includes additional details beyond what a tri-merge report provides. 

Unlike regular credit reports, which individuals can access annually for free, borrowers cannot obtain an RMCR on their own. It’s a specialized report designed exclusively for mortgage lenders who need deeper insights into the risks of lending a lot of money—in many cases hundreds of thousands of dollars.

It’s also worth noting that because the Fair Credit Reporting Act (FCRA) limits who can see your credit report and for what reasons, you can rest assured that your information will remain confidential. 

Is a credit report just as important when renting a home?

Much like buying a home, landlords and rental agents want to know that they can trust a tenant with their property and can count on them to make regular, on-time rent payments. Making credit reports a standard part of the screening process helps landlords gain the confidence to hand over the keys. 

With a solid credit report and credit score, landlords and rental agents can accept a tenant with peace of mind. However, before obtaining a copy of a potential tenant’s credit report, a landlord or rental agent must get an applicant’s permission first. Landlords may also consider factors like credit utilization and any derogatory marks on the report to determine if they can financially trust a potential tenant. 

RentSpree: your one-stop solution for credit reports and scores

If you’re a landlord or a rental agent, ordering a credit report for a tenant can provide invaluable information to help you make an educated decision about whether they will be a suitable fit for your property. 

At RentSpree, we make it easy and quick for you to request a credit or screening report. When the report is ready to go, our service will contact you and share a link for you to access it. You’ll be able to see a comprehensive view of a tenant's credit history and their credit score. This way, not only will you be able to assess their financial responsibility and stability with confidence, but you’ll also set yourself up for a successful landlord-tenant relationship.

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Has COVID changed the importance of credit reports?

COVID-19 has adjusted regulations and practices across the whole world, and the real estate and credit industries are no different. The CARES act changed credit reporting by allowing accounts to continue to show as current while under pandemic-related forbearances and moratoriums. As shared by Experian, this reporting law is in effect for:

Guidelines for all agreements made between January 31, 2020, through either July 25, 2020 (120 days after March 27, 2020, when the law was enacted), or 120 days from the date the COVID-19 national emergency is declared over

During the pandemic, the average consumer credit score has continued to rise from 703 to 710, yet as of December, 2020 at least 3 percent of American’s were in a financial hardship program while still reporting as current on payments -- numbers which could change drastically if repayment terms are not met.

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