What is a credit report 

 

Your credit payment history is documented in a file or report, which is maintained and sold by "consumer reporting agencies" (CRAs). A common type of CRA is a credit bureau. If you've ever applied for a credit or charge account, a personal loan, insurance, or a job, you likely have a credit record on file with a credit bureau. This record includes information about your income, debts, and credit payment history. It may also indicate if you have been sued, arrested, or filed for bankruptcy.

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Can I see my credit report?

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Yes, if you request it. The CRA is required to provide you with all the information in your report, including medical information, and, in most cases, the sources of that information. The CRA must also provide you with a list of everyone who has requested your report within the past year, or the past two years for employment-related inquiries.

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What type of information do credit bureaus collect and sell?

Credit bureaus gather and sell four main types of information:

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Identification and Employment Information
Your name, date of birth, Social Security number, employer, and spouse's name are typically recorded. If requested by a creditor, the CRA may also provide details about your employment history, home ownership, income, and previous addresses.

Payment History
This section lists your accounts with various creditors, indicating the amount of credit extended and whether payments have been made on time. It may also include related events, such as overdue accounts referred to collection agencies.

Inquiries
CRAs are required to keep a record of all creditors who have requested your credit history in the past year, as well as a record of individuals or businesses requesting your credit history for employment purposes over the past two years.

Public Record Information
This includes events that are part of the public record, such as bankruptcies, foreclosures, or tax liens, which may be included in your report.

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What is credit scoring

Credit scoring is a method used by creditors to determine whether to extend credit to you. It involves gathering information from your credit application and credit report, including your bill payment history, the number and types of accounts you hold, any late payments, collection actions, outstanding debt, and the age of your accounts. This information is then compared to the credit behavior of other consumers with similar profiles using a statistical program. Points are assigned to each factor that predicts the likelihood of repaying a debt, resulting in a total score known as a credit score. This score helps indicate how creditworthy you are, meaning how likely you are to repay a loan and make payments on time.

The most commonly used credit scores are FICO scores, developed by Fair Isaac Company, Inc. These scores range from 350 (high risk) to 850 (low risk).

Since your credit report is a key component of many credit scoring systems, it's crucial to ensure its accuracy before applying for credit. You can obtain copies of your report from the three major credit reporting agencies:

Equifax: (800) 685-1111
Experian: (888) EXPERIAN (397-3742)
TransUnion: (800) 916-8800

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These agencies may charge up to $9.00 for your credit report.

You are entitled to one free credit report every 12 months from each of the nationwide consumer credit reporting companies—Equifax, Experian, and TransUnion. This free report may not include your credit score and can be requested through the website: https://www.annualcreditreport.com.

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Why is credit scoring used

Credit scoring relies on real data and statistical analysis, making it generally more reliable than subjective or judgmental approaches. It provides an objective assessment of all applicants. In contrast, judgmental methods often use criteria that haven't been systematically tested and can differ based on the individual's interpretation.

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How is a credit scoring model created?

To create a credit scoring model, a creditor selects a random sample of its customers or a similar group if the original sample is too small. They then analyze this sample statistically to identify characteristics linked to creditworthiness. Each characteristic is assigned a weight based on its effectiveness in predicting good credit risk. Creditors may use their own unique credit scoring models, different models for various types of credit, or a generic model developed by a credit scoring company.

Under the Equal Credit Opportunity Act, credit scoring systems cannot use certain characteristics—such as race, sex, marital status, national origin, or religion—as factors. However, age can be used in properly designed scoring systems, provided that elderly applicants receive equal treatment.

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How reliable is the credit scoring system?

Credit scoring systems allow creditors to assess millions of applicants consistently and fairly based on numerous characteristics. However, for these systems to be statistically valid, they must rely on a sufficiently large sample. Keep in mind that these systems can vary from one creditor to another.

While credit scoring may seem arbitrary or impersonal, a well-designed system can make decisions more quickly, accurately, and impartially than individuals. Many creditors design their systems to refer borderline cases—where applicants' scores are neither clearly passing nor failing—to a credit manager. In such cases, the credit manager can make the final decision, potentially allowing for discussion and negotiation between the consumer and the lender.

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What can I do to improve my credit?

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Credit scoring models are intricate and often vary between creditors and for different types of credit. If one factor changes, your score may fluctuate—though improvements generally depend on how that factor interacts with other elements considered by the model. Only the creditor can clarify what might enhance your score under the specific model used for evaluating your credit application.

However, scoring models typically assess the following types of information from your credit report:

Payment History: This is usually a crucial factor. If you've paid bills late, had accounts referred to collections, or declared bankruptcy, these actions may negatively impact your score if they appear on your credit report.

Outstanding Debt: Many scoring models evaluate the amount of debt you have relative to your credit limits. Owing amounts close to your credit limit can negatively affect your score.

Length of Credit History: Generally, the length of your credit history is considered. A short credit history might impact your score, but this can be offset by other factors like timely payments and low balances.

Recent Credit Inquiries: Scoring models often take into account whether you've applied for new credit recently by looking at "inquiries" on your credit report. Too many recent applications for new accounts can negatively affect your score. However, not all inquiries count, such as those from creditors monitoring your account or making "prescreened" credit offers.

Number and Type of Credit Accounts: Having established credit accounts is generally positive, but too many credit card accounts can negatively impact your score. Additionally, some models consider the types of credit accounts you hold; for instance, loans from finance companies may negatively affect your credit score under certain models.

Scoring models may also consider information beyond your credit report, such as details from your credit application, including your job or occupation, length of employment, or homeownership status.

To improve your credit score under most models, focus on paying your bills on time, reducing outstanding balances, and avoiding new debt. Significant improvement in your score is likely to take some time.

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What happens if you are denied credit or don't get the terms you want?

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If you've been denied credit, or didn't get the rate or credit terms you want, ask the creditor if a credit scoring system was used. If so, ask what characteristics or factors were used in that system, and the best ways to improve your application. If you get credit, ask the creditor whether you are getting the best rate and terms available and, if not, why. If you are not offered the best rate available because of inaccuracies in your credit report, be sure to dispute the inaccurate information.

If you are denied credit, the Equal Credit Opportunity Act requires that the creditor give you a notice that tells you the specific reasons your application was rejected or the fact that you have the right to learn the reasons if you ask within 60 days. Indefinite and vague reasons for denial are illegal, so ask the creditor to be specific. Acceptable reasons include: "Your income was low" or "You haven't been employed long enough." Unacceptable reasons include: "You didn't meet our minimum standards" or "You didn't receive enough points on our credit scoring system."

If a creditor says you were denied credit because you are too near your credit limits on your charge cards or you have too many credit card accounts, you may want to reapply after paying down your balances or closing some accounts. Credit scoring systems consider updated information and change over time.

Sometimes you can be denied credit because of information from a credit report. If so, the Fair Credit Reporting Act requires the creditor to give you the name, address and phone number of the credit reporting agency that supplied the information. You should contact that agency to find out what your report said. This information is free if you request it within 60 days of being turned down for credit. The credit reporting agency can tell you what's in your report, but only the creditor can tell you why your application was denied.

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Fair Credit Reporting Act

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The Fair Credit Reporting Act (FCRA) aims to ensure that credit reporting agencies (CRAs) provide accurate and complete information to businesses when they evaluate your application.

Your rights under the Fair Credit Reporting Act include:

Access to Your Credit Report: You have the right to obtain a copy of your credit report, which must include all the information in your file at the time of your request.

Disclosure of Report Recipients: You have the right to know the name of anyone who received your credit report in the past year for most purposes, or in the last two years for employment purposes.

Information on Denied Applications: If a company denies your application based on information from a CRA, they must provide the name and address of the CRA they contacted.

Free Credit Report After Denial: You are entitled to a free copy of your credit report if your application is denied due to information from a CRA. You must request this report within 60 days of receiving the denial notice.

Right to Dispute: If you believe the information in your report is incomplete or inaccurate, you can file a dispute with the CRA and the company that provided the information. Both parties are legally required to reinvestigate your dispute.

Right to Add a Summary: If your dispute is not resolved to your satisfaction, you have the right to add a summary explanation to your credit report.

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