Credit reports represent different things to varying audiences. For consumers, the report represents their past, specifically their history of taking on credit and the track record of paying as promised. Lenders, on the other hand, are using credit reports for a more forward-looking view. If they agree to lend a consumer money, the report is arguably the best indicator of the likelihood of repayment. It serves as a 'crystal ball' for lenders by using historical consumer activity to predict future creditworthiness.
The first recorded consumer credit report activity is said to have dated back to 1899, in Atlanta, where a company named Retail Credit Company was founded. The present-day name of that company – Equifax – the oldest of the 'Big 3' credit reporting agencies.
Credit report terms are not always intuitive, especially if you are not an industry veteran. Fortunately for all of us, credit reports follow the same general structure, using standardized terminology – regardless of the agency. This makes it easy to cross-reference specific items of interest for the novice and the subject matter expert.
In this article, we provide the ten credit report terms every mortgage professional should know.
Without question, the most critical component for reviewing a consumer's credit history. There are different scoring models, but each uses a three-digit number to represent the likelihood a consumer will pay their debts.
Each separate credit account is its own tradeline, showing creditor name and address, debt information, type of account, date of last activity, current balance, and other historical details.
There are different types of accounts or tradelines, with the main two being revolving credit lines (e.g., credit cards and HELOCs) and Installment accounts (e.g., mortgages and auto loans, etc.).
A term used to describe the amount of currently outstanding debt compared against the credit limit. This is a significant factor for mortgage underwriters – and impacts credit scores.
When consumers apply for a loan or credit card, they approve a request to check the credit, known as a hard inquiry (or 'hard pull'). Each hard inquiry can hurt the overall credit score. In general, the fewer, the better, especially within 12 months. Conversely, a soft inquiry ('soft pull') is identified when you check your credit or give someone authorization to do so. Further, when a lender (credit card issuer, mortgage company, etc.) prepares a pre-approved offer for you, this also results in a soft inquiry. Since you did not specifically apply for the offer, these pre-approval actions get tagged as soft inquiries, not impacting credit scores.
Consumers are always urged to monitor and proactively manage their credit history, addressing and resolving discrepancies. Credit reports make it relatively easy to dispute items. However, keep in mind, credit disputes can adversely impact the mortgage application process, suspending it until a final dispute resolution is reported. The lender's concern is that the credit bureaus typically remove the negative item altogether from the credit scoring model. This will likely cause the consumer's credit score to increase in the interim dispute period. This may be good from the consumer's perspective. Still, a lender making a credit decision on a potentially 'falsely inflated' credit score, even when just temporarily inflated, introduces additional lender credit risk.
This is almost always a sign of concern for lenders, used when an account has been turned over to a collection agency or sold to a debt buyer. Naming the original creditor is critical in helping consumers recall details about the account.
These are considered to be serious delinquencies or late payments on accounts. Examples can include bankruptcy, foreclosure, repossession, judgment, lien, account in collections, charge-off, or an account settled for less than what was owed.
The Fair Credit Reporting Act. In short, it ensures that consumers know their rights and that lenders understand their regulatory and compliance responsibilities.
In prior years, this section of the credit report was likely not utilized or uninformative. Since the 2020 COVID-19 pandemic, that has changed. The CARES Act gave the ability for eligible mortgagees to enter into forbearance plans with their mortgage servicer or lender. While the legislation disallows negative impacts or derogatory marks, you can generally identify comments such as:
We offer several solutions that streamline reviewing credit report data to help mortgage professionals evaluate your borrower's entire credit history story. For more information, check out our origination solutions like the TriMerge Credit Report or the Residential Mortgage Credit Report.