You know how important it is to check your credit report at least once per year, but do you know what to look for?
Your credit report contains a lot of key information about your payment history, various credit accounts you’ve had, and how you’ve handled financial obligations such as credit card debts, mortgages, student loans or auto loans.
It’s a given that negative items such as late payments, charge-offs or collection accounts on your credit report can be damaging to you – financially and from a credit-scoring standpoint.
But what about some other, less obvious red flags that could be marring your credit report?
Even if you have a good FICO score, there’s no guarantee that a lender will approve you for a loan if certain information appears on your credit history.
And almost all lenders – as well as many employers – will take a very close look at your credit report to check for any red flags that could indicate you aren’t so trustworthy with credit or a job.
Here are three not-so-obvious red flags on your credit report that might send a warning sign to a prospective lender or employer:
#1: Having a 100-word Consumer Statement on Your Credit Report
Under the Fair Credit Reporting Act, you have the right to add a Consumer Statement to your credit report. This is a short explanation for something on your credit report that might not look so attractive to a lender or future employer.
For example, your 100-word statement might be something very brief and basic, like: “While I was 90 days late on my credit card payments in early 2012, the late payments only resulted because I was unemployed for six months.”
You may think this Consumer Statement helps a creditor “understand” why you missed certain payments. However, this justifying statement can actually end up raising a red flag for anyone who is glancing over your report.
If you have a borderline application, you may appear to be a bad credit risk – even if you have a very legitimate explanation.
Right or wrong, some lenders will think you didn’t practice “good money management” or that you weren’t a “good saver” if you had a lengthy delinquency.
They want to know that regardless of your circumstances — and yes, that includes unemployment — that you will somehow meet your financial obligations. In the back of their minds, they’re thinking: “What if we approve the loan and he/she becomes unemployed again? Will he/she be late on our loan payments?”
Likewise, if you got behind on bills due to issues like divorce or medical illness, an employer might think you’re a hiring risk due to personal problems.
Employers worry that workers with serious personal problems – financial problems, relationship problems and so on – are often “distracted” at work by their personal problems and thus less productive, or even more likely to be late and absent from the job.
Whether these assumptions and worries on the part of lenders and employers are fair, or even correct, isn’t the point.
What is relevant is that to some people who review your credit report, having that Consumer Statement might raise an unnecessary red flag or may simply appear like an “excuse” or a “rationalization” for why you didn’t meet certain obligations.
For these reasons and others, in most cases it’s best to just avoid adding this Consumer Statement to your credit report altogether.
#2: Excessive Number of Credit Card Accounts
While there is no “ideal” number of credit card accounts a given consumer should have, it’s generally not a good idea to have dozens of open accounts and credit lines.
Having an excessive number of credit cards – even if you don’t use some of them – could present you as someone who is spending beyond their means, or at least giving themselves the option to do so.
In some cases, having too many credit card accounts or access to numerous lines of credit can make you appear to be a high-risk candidate for more credit.
#3: Recent Inquiries on Your Credit Report
If you’ve been shopping around for a loan and banks have been pulling your credit report, the activities will show up on your credit report.
Add a few store credit card applications or credit card offers to the mix, and a prospective lender might be wondering why you’re so desperate to obtain credit.
Avoid applying for multiple credit cards within a space of a few weeks or months — especially if you know you’re going to be applying for a larger loan such as a mortgage or an auto loan.
When you are shopping for a home loan or car loan, try to time your applications so that any time a lender pulls your credit, those inquiries are done within two weeks of each other. That way, those multiples reviews of your credit get counted as a single inquiry, doing less damage to your overall credit score.
Regardless of whether you currently have perfect credit or shaky credit, it’s important to manage your credit and debt wisely so you aren’t perceived as a high-risk borrower or a potentially poor job candidate.