Credit Reports and Ratings

Credit Reports and Ratings                                          
by Michael Sanibel

Understanding & Improving Your Credit Score
Credit information and access to your credit report are governed by the Fair Credit Reporting Act (FCRA) of 1970, and enforcement authority resides with the Federal Trade Commission (FTC). The three major credit bureaus that collect information in the United States are TransUnion, Experian, and Equifax. Because each of these companies collects data in different ways and from different sources, the reports they generate will not necessarily match. Also, if you apply for a loan, you may not know which report(s) the lender will use in evaluating your creditworthiness. It's important that you review and understand the contents of all three reports to ensure they are timely and accurate.

Access
You have the right to an annual credit report from each of the three bureaus. If you stagger them every four months, you would receive three fresh reports each year. Any person or entity that wants to see your report must either have your advance consent or a "permissible purpose.” As defined by the FCRA, this includes any person or business that has a demonstrated need to know if you pay your bills on time.

This consists of banks, savings & loans, credit card companies, and credit unions. A potential landlord has the right to verify your credit, and many lease agreements contain a consent clause for a background check. Applications for new insurance policies may also include a consent clause. The government can get your report if you have a financial connection to a government agency that provides benefits administration or issues licenses. Potential employers must seek your consent since an offer of employment does not require credit approval.

What's in the report
There are four data categories contained in the credit report: personal identifying information, public record, recent inquiries, and credit history statistics. The public information consists of existing data that are kept in official government records, such as city, county, and state agencies. It includes court judgments, foreclosures, bankruptcies, and tax liens. The inquiry section tracks all persons and entities that have received your credit report in the last year.

The credit history is usually the most important portion of the report since it has the most impact on your credit score. It's also the most likely to contain errors, so it's imperative that you periodically review your report and take action to correct it. If your bills are all current, this section may be very short since it focuses on the accounts where you are behind in your payments. Listed will be outstanding accounts with mortgage companies, S&Ls, banks, utilities, retailers, credit cards, and any other company that has extended credit.
How long the information stays in your report depends on the type:
  • 7 years – general information
  • 10 years – bankruptcy
  • 15 years – tax liens

Credit score
Most references to your credit score are to the proprietary number created by the Fair Isaac Corporation (FICO). The scores range from a low of 300 to a high of 850. The company uses an algorithm to take the information in your credit report and quantify the result into a single figure. Lenders use this composite score to gauge your ability to pay against the scale of possible scores. While it is only one of several factors they
might use in making a decision about granting credit, it's a very important one.

While lenders can set the bar wherever they want regarding their minimum score requirement, the threshold for a "good” rating is generally in the area of 700-725. In addition to getting you credit, higher scores will also help you to negotiate lower interest rates. Due to the implosion of the housing bubble and the resulting credit crisis, some lenders may demand even higher scores.

Since the credit bureaus draw from different sources to create their reports, their credit scores may not be equal. Lenders have the option of using one or more of these scores.


Improving your score
Step one is to make all your payments in full and on schedule. If you carry more than four or five credit cards, the additional cards are not helping your credit score. In fact, it will appear that you are overextending your available credit. It's better to have a low balance on a few cards than to be maxed out on one. This is because credit utilization, or the percentage of your credit limit you are using, is a factor in determining your score. The lower the utilization rate the better.

Once the accounts are opened, however, there is no advantage to closing them because the damage has already been done. The point is to avoid opening any new accounts that are not absolutely necessary. It's far better to have a few credit cards and use them consistently over a long period of time. This builds up your history which is a key component of the overall score. Don't close your oldest accounts because that will cut off your earliest credit history.

It's also wise to minimize the number of credit checks since each one deducts about five points from your score. Lenders assume that if lots of checks are being done, you may be having financial problems even if that's not the case. Only apply for credit if you really need it, and make sure the amount is large enough to avoid going back to the well for more.

Avoid things that could hurt your score: foreclosure, bankruptcy, short sales, debt settlement, court judgments, and loan or credit default. Also remember that forgiven debt is considered taxable income by the IRS.

Set up your bills for automatic payment. This saves time, postage expense, and protects you against late payment penalties. The higher your credit score, the bigger the hit will be if you are delinquent. If you can't pay your bills, be proactive and try to work something out with your creditors.

Protecting yourself
Identity theft is on the rise. Be careful when you use a credit card and protect your passwords. You have the option of placing fraud alerts or a freeze on your file. The freeze will prevent anyone from illegally using your file to obtain credit for themselves in your name. Under a freeze, your report can't be released to anyone without your written authorization. Only you can lift the freeze should the need arise for new credit.

If you can't resolve issues with your credit file, you can file a complaint with the Federal Trade Commission. If you think you've been a victim of credit fraud, file a police report.

Michael Sanibel (www.michaelsanibel.com) is a freelance writer specializing in business, marketing, personal finance, law, science, aviation, sports, entertainment, travel, and political analysis. He graduated from the United States Air Force Academy and is also licensed to practice law in California and New Hampshire.