Credit Scores and Reports: What You Need to Know

Credit Reports

Credit reports were invented to help lenders judge whether to extend credit to specific people, how much credit to extend, and at what cost or interest rate.

credit reporting bureaus

Three companies, Experian, TransUnion and Equifax, collect and sell credit information about individuals to lenders. Credit reports from these companies include:

• Whether the person filed for bankruptcy within the last ten years (Chapter 7) or seven years (Chapter 13).
• A list of all credit accounts in the person’s name that are open today or closed in the last seven years.
• A list of accounts in collection, for seven years from the most recent payment.
• Any “inquiries”: Requests made by businesses or organizations in the past two years for the person’s credit report or score.
• Any judgment (a court decision affecting the person’s finances) entered against the person in the last seven years.
• Any tax lien filed against the individual’s property. These appear on credit reports for fifteen years if the lien is unpaid and for seven years after the lien is released.

Credit scores

Credit scores were invented to make it easier for creditors to get a snapshot of an individual’s overall creditworthiness. The scores are based on an algorithm, or mathematical formula, developed by the company that calculates and sells the credit score. Credit scores are based on information from a person’s credit report at the time the score is calculated. Therefore, a score can change frequently and it is impossible to know why a score changed or to predict how much a score will change because the score formula is a company secret. The leading company in the credit scoring business is Fair Isaac Corporation, and its credit score, called FICO, is the best known.

Why should you care about these boring things?

• If you borrow money, the interest rate you’ll be charged depends in part on what’s on your credit report.
• Your credit score affects important costs like your insurance rates.
• When you apply for a job or an apartment, the prospective employer or landlord may, with your permission, obtain and review your credit report or score. You can be denied a job or an apartment based solely on your credit history.
• Your utility companies may obtain your credit report or score, and may require you to deposit money to them if they believe you cannot pay your bill.

what to do

1. About 20% of all credit reports include negative misinformation. You can and should force the removal of inaccurate negative information from your credit report. If you don’t do this, no one will.. Every American has the right to get a free credit report once a year from each from all three credit reporting agencies. Reports can differ between bureaus, so here’s what to do: Every four months, get your free credit report from one of the three bureaus. Rotate between offices to get the only free annual report from each office to which you are entitled. Please review the report carefully. Follow the Federal Trade Commission’s procedures to force the removal of any inaccurate negative information on your credit report.
2. Checking your credit report every four months will also help you know early if your identity has been used fraudulently. Have credit accounts been opened or credit inquiries made in your name? Take immediate action to limit the potentially enormous inconvenience that identity theft can cause by following the instructions in the FTC’s Consumer Alert on Identity Theft.
3. In addition to the free annual credit reports you’re entitled to, you can also get a free credit report if you’re denied credit, insurance, or employment because of your credit history, or if you’re a victim of fraud or identity theft.
4. Understand how your behavior affects your FICO score. Go directly to the source, Fair Isaac Corporation. Download and study Fair Isaac’s guide, “Understanding Your FICO Score” (just Google the title of the guide to find it online). Carefully read the section, “What Considers a FICO Score.” These pages give you suggestions for improving your FICO score in each of the five main areas included in the score calculation. Some of the recommendations are obvious – pay your bills on time – but many may be the opposite of what you might assume.
5. Don’t get hung up on your credit score. when you get your credit reportthe bureau will try to sell you a loan score. (Credit reports are free once a year, but you’ll have to pay to get a credit score.) Don’t let curiosity get the better of you and pay money for a credit score. Instead, read “Understanding Your FICO Score,” follow their suggestions, and don’t obsess over your credit score.

Guarantee

Yes, you should read “Understanding Your FICO Score,” but don’t blindly follow all the suggestions. For example, you’ll learn that to have the highest FICO score, you must have some debt of different kinds, including a credit card, and demonstrate that you can handle debt responsibly. But if you can’t trust yourself to use a credit card wisely, then I have no credit card and forget about the effect on your credit score. Having a credit card and using it recklessly will have a worse effect on your credit score than having no credit card at all.

Don’t be fooled by expensive “credit repair” scams or other offers to “clean” your credit report. Accurate information that has not yet expired cannot be permanently removed from your credit report, period.

By taking advantage of certain details of the Fair Credit Reporting Act, credit repair scammers can remove certain negative information from your report. But if the removed information is proven to be accurate, it will be quickly put back on your report and you will have wasted the money you paid to the credit repair scammer.

It’s very easy to remove negative inaccurate information from your credit report. You can do it yourself for free.