Understanding Your Credit Report and Score

Editor's Notes

1. DMP info page 8
2. DNA page 4 It is well established that credit scores are now a cornerstone of the U.S. credit system. Credit scores determine or at least greatly influence access to housing, unsecured credit lines, insurance, utility and cell phone services, and employment. Since they are based on credit reports, it is imperative that the underlying data be correct for (1) the score to have any meaning and (2) for consumers to accept the validity of credit scoring. Incidence of errors page 4 The Public Interest Research Group (PIRG) published a study, " Mistakes Do Happen: A Look at Errors in Consumer Credit Reports" ( www.pirg.org ), in which it was found that "one in four credit reports contains errors serious enough to cause consumers to be denied credit, a loan, an apartment or home loan or even a job." It’s vital to see your report and score page 11 In everyone’s life, there are always instances where credit is needed. From your first credit card to the last mortgage payment and every account in between, all these make up your credit history. The companies and people that give credit, such as banks, finance companies and other creditors, report information about you. These creditors send information regularly about your accounts to credit reporting bureaus that collect and archive this information. Your credit report can then be accessed by other creditors or distributed to others that are authorized to receive such information. The importance of good credit page 11 If you are thinking of buying a house, a car or simply applying for a new credit card, your credit report represents the first step in the lender’s decision-making process. The fact of the matter is that you need to have a good credit history in order to get credit. What is good credit? Simply put, a person with “good credit” has a well-established history of having paid their accounts on time.
3. DNA page 4 It is well established that credit scores are now a cornerstone of the U.S. credit system. Credit scores determine or at least greatly influence access to housing, unsecured credit lines, insurance, utility and cell phone services, and employment. Since they are based on credit reports, it is imperative that the underlying data be correct for (1) the score to have any meaning and (2) for consumers to accept the validity of credit scoring. Incidence of errors page 4 The Public Interest Research Group (PIRG) published a study, " Mistakes Do Happen: A Look at Errors in Consumer Credit Reports" ( www.pirg.org ), in which it was found that "one in four credit reports contains errors serious enough to cause consumers to be denied credit, a loan, an apartment or home loan or even a job." It’s vital to see your report and score page 11 In everyone’s life, there are always instances where credit is needed. From your first credit card to the last mortgage payment and every account in between, all these make up your credit history. The companies and people that give credit, such as banks, finance companies and other creditors, report information about you. These creditors send information regularly about your accounts to credit reporting bureaus that collect and archive this information. Your credit report can then be accessed by other creditors or distributed to others that are authorized to receive such information. The importance of good credit page 11 If you are thinking of buying a house, a car or simply applying for a new credit card, your credit report represents the first step in the lender’s decision-making process. The fact of the matter is that you need to have a good credit history in order to get credit. What is good credit? Simply put, a person with “good credit” has a well-established history of having paid their accounts on time.
4. Establishing Credit/Credit bureau reporting: page 12 The credit bureau’s business is credit reporting. What they do is collect information about consumers from banks, savings and loan institutions, credit unions, finance companies and other businesses. This information is stored in a database and when you apply for a new loan, the creditor orders information on you from the bureaus. The credit bureaus don’t keep track or record the outcome of that credit inquiry of your credit report.
5. What Information Is Contained In My Credit Report A Typical Credit Report Includes Four Types of Information Identifying Information Credit Information Public Record Information Inquiries Where can I get a copy: annualcreditreport.com MyFico.com
6. Review credit reports regularly . An accurate report will be an honest representation of a consumer’s history. Take control of yours. Pay bills on time . More recent negative remarks on a credit report are worse than problems that occurred years ago. For example, an account that has been delinquent in the past six months will do more damage to a credit score than a similar delinquency five years earlier. Reduce your overall debt . Keep your balances below 50% of your line of credit – pay off unpaid collections, judgments and tax liens. Limit revolving card usage . The goal should be not to max out your revolving or “open” lines of credit. Revolving means you can use it, pay it off, and use it again. Some experts advise no more than 50%, some say 35% as the maximum utilization level. Length of credit history Be aware that closing unused accounts may reduce your score. In choosing to close accounts, older accounts with a good history are the ones to keep because the age of an account and your length of time in the credit world also factors in the score. Easy access to credit may create the potential to get into trouble by going on a spending spree and racking up new debt, and lots of account numbers create more targets for identity theft. Limit the number of inquiries . Apply for credit only when necessary and get your credit report in advance. When shopping for a new car or a mortgage, make all applications within a 14-day period – inquiries will only count as one. Too many inquiries in a short period may be seen as an indication of financial problems or loading up on new credit. The scoring model is supposed to consolidate inquiries of the same type within a specific amount of time, which is 30 days.
7. There are many types of proprietary credit scores. Fair Isaac Corporation developed the most widely used scoring algorithm (model). It is a general risk score (some call it a rating) that indicates the probability of default. The higher the FICO score, the lower the risk. Creditors have different pricing tiers based on the score level. The number is the result of a complicated calculation based on the data in your credit report. The FICO score ranges from 300-850 other scoring models use different ranges. TransUnion and Experian have their own scores. TransUnion’s is called “Empirica” and Experian’s is called “PLUS Score,” but these are not true FICOs (some call them “FAKO’s”). Equifax uses the true FICO score, privately labeled as “Beacon.” Your credit score is based on five factors. These factors and their percentage impact on the score’s calculation are as follows: 35% - Payment history (bankruptcies, late payments and collections). 30% - Outstanding debt (credit card balances and number of cards, also known as utilization). 15% - Length of credit history (age of oldest credit card account, average age of accounts, time since accounts were used). 10% - Pursuit of new credit (number of inquiries from potential lenders and newly opened credit accounts). 10% - Types of credit (bank cards, department store cards, finance companies, secured, unsecured). The scoring model likes to see a balanced report, with both installment and revolving accounts.
8. Review credit reports regularly . An accurate report will be an honest representation of a consumer’s history. Take control of yours. Pay bills on time . More recent negative remarks on a credit report are worse than problems that occurred years ago. For example, an account that has been delinquent in the past six months will do more damage to a credit score than a similar delinquency five years earlier. Reduce your overall debt . Keep your balances below 50% of your line of credit – pay off unpaid collections, judgments and tax liens. Limit revolving card usage . The goal should be not to max out your revolving or “open” lines of credit. Revolving means you can use it, pay it off, and use it again. Some experts advise no more than 50%, some say 35% as the maximum utilization level. Length of credit history Be aware that closing unused accounts may reduce your score. In choosing to close accounts, older accounts with a good history are the ones to keep because the age of an account and your length of time in the credit world also factors in the score. Easy access to credit may create the potential to get into trouble by going on a spending spree and racking up new debt, and lots of account numbers create more targets for identity theft. Limit the number of inquiries . Apply for credit only when necessary and get your credit report in advance. When shopping for a new car or a mortgage, make all applications within a 14-day period – inquiries will only count as one. Too many inquiries in a short period may be seen as an indication of financial problems or loading up on new credit. The scoring model is supposed to consolidate inquiries of the same type within a specific amount of time, which is 30 days.
9. In 1970 the Fair Debt Collection Practices Act (FDCPA) became law. Its purpose is to prevent abusive, deceptive and unfair debt collection practices by debt collectors. Congress enacted the Fair Credit Reporting Act (FCRA) in April 1971. This established guidelines for credit bureaus, credit reporting agencies, and creditors/collectors to follow in reporting our individual credit history. The Fair and Accurate Credit Transactions Act (FACTA), is the name of the new law, which amended FCRA in late 2003. It establishes uniform national standards and preempts state laws in most instances, although some states were able to maintain their own laws regulating credit reporting and consumer access. The law provides significant new consumer protections regarding resolution of disputes and identity theft, among others.
10. All incorrect, incomplete, or outdated information can be disputed Be succinct in stating what your desired result is and provide documentation. If the information is outdated, it should be promptly removed. For information that the consumer believes is inaccurate or incomplete, the credit bureau has 30 days to verify the information with the creditor to ensure that it is correct. If the creditor cannot document the truthfulness of the disputed information, it must be deleted from the credit report. It is often necessary to dispute the same item with all credit reporting agencies that have recorded the negative notation. Credit bureaus do not communicate or share information and making a correction on one report does not mean the correction will appear on the report of a different bureau. Mail everything certified mail, return receipt requested. Disputes can be filed easily over the Internet; however, the conventional wisdom is that mailed disputes are the most effective and that certified mail should be used. You may use the sample dispute letters found at the back of the Consumer Guide to Good Credit.
11. All incorrect, incomplete, or outdated information can be disputed Be succinct in stating what your desired result is and provide documentation. If the information is outdated, it should be promptly removed. For information that the consumer believes is inaccurate or incomplete, the credit bureau has 30 days to verify the information with the creditor to ensure that it is correct. If the creditor cannot document the truthfulness of the disputed information, it must be deleted from the credit report. It is often necessary to dispute the same item with all credit reporting agencies that have recorded the negative notation. Credit bureaus do not communicate or share information and making a correction on one report does not mean the correction will appear on the report of a different bureau. Mail everything certified mail, return receipt requested. Disputes can be filed easily over the Internet; however, the conventional wisdom is that mailed disputes are the most effective and that certified mail should be used. You may use the sample dispute letters found at the back of the Consumer Guide to Good Credit.
12. All incorrect, incomplete, or outdated information can be disputed Be succinct in stating what your desired result is and provide documentation. If the information is outdated, it should be promptly removed. For information that the consumer believes is inaccurate or incomplete, the credit bureau has 30 days to verify the information with the creditor to ensure that it is correct. If the creditor cannot document the truthfulness of the disputed information, it must be deleted from the credit report. It is often necessary to dispute the same item with all credit reporting agencies that have recorded the negative notation. Credit bureaus do not communicate or share information and making a correction on one report does not mean the correction will appear on the report of a different bureau. Mail everything certified mail, return receipt requested. Disputes can be filed easily over the Internet; however, the conventional wisdom is that mailed disputes are the most effective and that certified mail should be used. You may use the sample dispute letters found at the back of the Consumer Guide to Good Credit.
13. In 1970 the Fair Debt Collection Practices Act (FDCPA) became law. Its purpose is to prevent abusive, deceptive and unfair debt collection practices by debt collectors. Congress enacted the Fair Credit Reporting Act (FCRA) in April 1971. This established guidelines for credit bureaus, credit reporting agencies, and creditors/collectors to follow in reporting our individual credit history. The Fair and Accurate Credit Transactions Act (FACTA), is the name of the new law, which amended FCRA in late 2003. It establishes uniform national standards and preempts state laws in most instances, although some states were able to maintain their own laws regulating credit reporting and consumer access. The law provides significant new consumer protections regarding resolution of disputes and identity theft, among others.