Your Credit Report and Credit Score
When you applied for your first credit card (probably back in high school or college), your name and a lot of personal information got zapped into a computer, and your personal credit report began. Since then, every time you applied for another credit card or a store card, took a vacation loan from your bank or credit union, or applied for a car loan, information was added to your credit report as well as to what is known as a credit score.
The three largest credit agency companies are Equifax Credit Services, TransUnion Credit Information Services, and Experian.
There are three big nationwide credit agency companies, and each of them probably has the same information about you and your credit history. They get it from banks, finance companies, credit card suppliers, department stores, mail order companies, and various other places that have had the pleasure of doing business with you. Smaller, regional credit bureaus supplement the information.
All the information on file concerning you and your credit history is evaluated and used to determine your credit score. This score is distributed to lenders to help them decide whether or not you're low-risk. The best known and most widely used score is the FICO score, which is based on a system developed by Fair, Isaac and Co., Inc. It's based on a mathematical equation that takes into account many types of information from your credit report. Your credit score identifies you either as a low-risk or high-risk candidate for a lender.
A potential lender will look at your credit report and your credit score when deciding whether or not to give you a loan. The lower your score, the less likely it is that you will be offered a loan. If you are offered one, it will undoubtedly come with a higher interest rate or more restrictive terms.
FICO scores are regarded as providing the best guides to future risk based solely on credit report data. Most U.S. consumers score between 300 and 850. Lenders look most favorably to those whose scores are 650 or higher. The general rule of thumb is that the higher your score is, the less risk you pose to a lender. Historically, people with high FICO scores have repaid loans and credit cards more consistently than people with low FICO scores. Although there is no single “cutoff score” used by all lenders, it is important to know and understand your score.
Usually, the FICO score is given with four reason codes, in order from the strongest negative reason to impact your score, and then the second strongest factor, and so on. It is important to understand how you scored (review your credit agency report at least once a year and especially before making a large purchase, like a house or a car). Ask what you can do to improve your score over time.
Here are several major factors that affect your credit score:
- Your level of revolving debt This is one of the most important factors considered for the FICO score. Even if you pay off your credit cards each month, your credit card may show the last billing statement in relation to your total available credit on revolving charges. If you think your FICO score should be higher, work to pay down your revolving account balances.
- Shifting balances Don't shift your credit card balances from one card to another to make it appear that you're being diligent about paying off debt. And don't open up new revolving accounts. These tactics will not improve your credit score.
- The length of time your accounts have been established This can hurt you when you're first starting out, but consumers with longer credit histories tend to be lower-risk than those with shorter credit histories.
When you understand how much credit information is floating around out there, it be-comes easy to see how mistakes are made with that information. Human error is a big factor, and somebody who misreads some information about you can screw up your credit report royally.
- Too many accounts with balances Too many credit card accounts with balances is a dangerous sign that you won't be able to make that many payments should your employment status change.
- Too many credit inquiries within the last 12 months Borrowers who are seeking several new credit accounts are riskier than persons who are not seeking credit, though these have only a small impact on your FICO score. These inquiries have much less impact than late payments, the amount you owe, and the length of time you have used credit.
Your personal credit report includes information such as your name, Social Security number, date of birth, your address from the time you first got a credit card until now, everywhere you've worked during that time, and how you pay your bills. Whenever you apply for a loan or for credit, the place at which you applied will check out your report with a credit agency. In turn, it will give the credit agency any additional information that it's picked up on you.
The Fair Credit Reporting Act limits who can see your credit report. Of course, the list is pretty long, but it does set some guidelines. Your credit report can be released by a reporting agency under the following circumstances:
- In response (God forbid!) to a court order or a federal grand jury subpoena.
- To anyone to whom you've given written permission.
- To anyone considering you for credit or collection of an account.
- To anyone who will use the report for insurance purposes.
- To determine your eligibility for a government license or benefits.
- To anyone with a legitimate business need for the report, in connection with a business transaction with which you're involved. This includes your landlord when you apply to rent an apartment.
Dollars and Cents
If you ever apply for a job in an area such as defense, banking, or the medical field, you can expect that your prospective employer will take a look at your credit report before deciding whether to hire you. If you're turned down for the job because of something in the report, you're required, under federal law, to be notified of your right to get a copy of the report at no charge.
Dollars and Cents
Experts recommend that you read your credit report carefully about once a year, especially before you apply for credit or when you know that the credit report will be checked (as when you rent an apartment). This is the only way to be sure that no mistakes have been made that will damage your credit record.
You have a legal right to submit a letter up to 100 words long to the credit agency, disputing something you've discovered on your credit report. The letter must be included in your file. If you do this, make sure your letter is clear, concise, and to the point.
When you realize how often your credit report can be accessed, then you can begin to see how important it is that you keep it clean. But even if your credit record is perfect, your report might not be, and that could affect your credit score. A study showed that one out of four people who took the time to thoroughly review their credit reports discovered a mistake that eventually was corrected. Be aware that every time an inquiry is made for your credit report, it is automatically logged into your report. Although this isn't necessarily bad, numerous inquiries may need to be explained to a potential lender.
You're going to learn more about why it's important to keep an eye on your credit report and exactly how to go about getting a copy of it.
How to Get a Copy of Your Credit Report
Even if you don't plan to apply for a car loan, a mortgage, or a credit card anytime soon, it's a good idea to take a look at your credit report once a year. You can get a copy of your report from any of the three largest credit agencies:
- Equifax Credit Services
PO Box 740241
Atlanta, GA 30374
- TransUnion Credit Information Services
Consumer Disclosure Center
PO Box 1000
Chester, PA 19022
PO Box 949
Allen, TX 75013
If you've been turned down for a mortgage, loan, or credit card, you're entitled to get a copy of your credit report for free at your request from the credit reporting service. Otherwise, if you want to get a copy of your credit report to check it over, there will be a fee (about $8 in most states). Call one of the companies listed here, or contact them by mail with an enclosed check or money order. Be prepared to provide your name, address, Social Security number, and maybe your date-of-birth as ID. We recommend that you get your annual update from a different company each year to check for errors. When you have the report, look it over carefully. If you discover a mistake, take the following steps to correct it:
- Contact all three credit agencies by certified mail and inform them of the mistake you've discovered. Request that they investigate.
- If you don't get a reply within 60 days, send another letter. Remind the com-panies that they are required by law to investigate incorrect information or provide an updated credit report with the incorrect information removed.
If you see information you don't like on your credit report that, unfortunately, isn't a mistake, don't despair. The Fair Credit Reporting Act mandates that negative information on your report be removed after a certain period of time. Even if you (gasp!) declare bankruptcy, that information is supposed to be removed from your report after 10 years. The trick, of course, is keeping your credit report healthy and in good shape. In this case, preventive maintenance works best.
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Excerpted from The Complete Idiot's Guide to Personal Finance in your 20s and 30s © 2005 by Susan Shelly and Sarah Young Fisher. All rights reserved including the right of reproduction in whole or in part in any form. Used by arrangement with Alpha Books, a member of Penguin Group (USA) Inc.
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