Advantages & Disadvantages of Credit Reports

Understanding your credit, or the credit history of someone you or your business considers lending money to, is essential to making good borrowing and lending decisions. Credit monitoring agencies are private organizations that collect information about how and when individuals borrow money and compile it into documents known as credit reports. Credit reports are valuable resources, but can also serve as obstacles for borrowers.

Credit Monitoring

Credit reports give consumers an accurate, convenient way to monitor their own credit. The federal government requires each of the three major credit monitoring agencies to provide one free credit report to each consumer who requests it once a year. By checking your own credit report on a regular basis, you can check for inaccuracies or suspicious activity that can help you identify cases of identity theft or credit fraud. Catching such activity early makes it easier to resolve, and knowing that your credit report is in order gives you the confidence to apply for a loan.

Gauging Credit Worthiness

For lenders, credit reports have the advantage of bringing together many pieces of financial data for a given borrower. This allows lenders to gauge a borrower's credit worthiness and evaluate the risk of making a specific loan. Credit reports contain information on past loans, any late or missed payments, available credit from other lenders and debt obligations. Without this information, lenders wouldn't be able to offer interest rates that reflect a borrower's likely risk or determine loan amounts as easily.

Cost

Beyond the annual free credit report, consumers must pay for additional copies of their credit reports. This means that anyone who experiences identity theft or credit fraud within a year of requesting a free report needs to pay to check the damage or confirm that their credit histories are accurate. Lenders also need to pay when they request credit reports, which is a cost they often pass on to loan applicants. Credit reports do not include credit scores, which are the three-digit numbers that summarize credit worthiness; credit reporting agencies charge for credit scores as well.

Difficulty of Repair

Credit reports are useful documents, but they take time to change and repair. While a major event such as a foreclosure or bankruptcy can significantly impair an individual's credit report, it can take years of on-time payments to undo the damage. Some items, including bankruptcy, remain on a credit report for up to 10 years. This means that lenders see a borrower's distant credit history as well as their more recent behavior, and misjudgments from the past can have long-lasting consequences.