What is a credit report?
Your credit payment history is recorded in a report. These files or reports are maintained and sold by “consumer reporting agencies” (CRAs). One type of CRA is commonly known as a credit bureau. You have a credit record on file at a credit bureau if you have ever applied for a credit or charge account, a personal loan, insurance, or a job. Your credit record contains significant information about you. Some of the information is about your employment, debts, credit payment history or if you have filed for bankruptcy.
Do I have a right to know what’s in my report?
Yes, if you ask for it. The CRA must tell you everything in your report, including medical information, and in most cases, the sources of the information. The CRA also must give you a list of everyone who has requested your report within the past year-two years for employment related requests.
What type of information do credit bureaus collect and sell?
Credit bureaus collect and sell four basic types of information:
- Identification and employment information: your name, birth date, Social Security number, employer, and spouse’s name are routinely noted. The CRA also may provide information about your employment history, home ownership, income, and previous address, if a creditor requests this type of information.
- Payment history: your accounts with different creditors are listed, showing how much credit has been extended and whether you’ve paid on time. Related events, such as referral of an overdue account to a collection agency, may also be noted.
- Inquiries: CRAs must maintain a record of all creditors who have asked for your credit history within the past year, and a record of those persons or businesses requesting your credit history for employment purposes for the past two years.
- Public record information: Events that are a matter of public record, such as bankruptcies, foreclosures, or tax liens, may appear in your report.
What is credit scoring?
Credit scoring is a system many creditors use to help determine whether to grant credit. Information about you and your credit experiences, such as your bill-paying history, the number and type of accounts you have, late payments, collection actions, outstanding debt, and the age of your accounts, is collected from your credit application and your credit report. Using a statistical program, creditors compare this information to the credit performance of consumers with similar profiles. A total number of points is derived from their statistical analysis and a credit score number is given to you. This numerical value helps predict how creditworthy you are and how likely you will repay a loan and make the payments when due.
The most widely used credit scores are FICO scores, which were developed by Fair Isaac Company, Inc. Your score will be from 400 to 850. The higher the score the lower the risk to the lender.
Because credit scoring has become so critical it is important that you make sure your credit report is accurate. It is highly recommended to get a copy of your credit report annually and the credit bureaus are required to give you a free copy yearly. It is a good idea to order your credit report every 4 months from a different agency and this will assure you that you are monitoring your credit consistently. You are entitled to receive one free credit report every 12 months from each of the nationwide consumer credit reporting companies – Equifax, Experian and TransUnion. This free credit report may not contain your credit score and can be requested through the following website: https://www.annualcreditreport.com.
Here is the contact numbers for the three major credit reporting agencies:
Equifax: (800) 685-1111
Experian: (888) 397-3742
Trans Union: (800) 916-8800
Try to avoid the “free credit monitoring” offers that charge you for a copy of your credit scores. There are numerous credit scoring models that are used for different purposes (over 50 different scoring models are known to exist and serve different purposes).
Why is credit scoring used?
Credit scoring is based on real data and statistics, so it usually is more reliable than subjective or judgmental methods. It treats all applicants objectively. Judgmental methods typically rely on criteria that are not systematically tested and can vary when applied by different individuals.
How is a credit scoring model developed?
To develop a model, a creditor selects a random sample of its customers, or a sample of similar customers if their sample is not large enough, and analyzes it statistically to identify characteristics that relate to creditworthiness. Then, each of these factors is assigned a weight based on how strong a predictor it is of who would be a good credit risk. Each creditor may use its own credit scoring model, different scoring models for different types of credit, or a generic model developed by a credit scoring company.
Under the Equal Credit Opportunity Act, a credit scoring system may not use certain characteristics like — race, sex, marital status, national origin, or religion — as factors. However, creditors are allowed to use age in properly designed scoring systems. But any scoring system that includes age must give equal treatment to elderly applicants.
How reliable is the credit scoring system?
Credit scoring systems enable creditors to evaluate millions of applicants consistently and impartially on many different characteristics. But to be statistically valid, credit scoring systems must be based on a big enough sample. Remember that these systems generally vary from creditor to creditor. Although such a system is arbitrary or impersonal, it helps make decisions faster, more accurately, and more impartially than individuals when it is properly designed.
What can I do to improve my score?
Credit scoring models are complex and often vary among creditors and for different types of credit. If one factor changes, your score may change — but improvement generally depends on how that factor relates to other factors considered by the model. In our history the following items do help during certain circumstances.
- Paying your bills on time: Payment history is a significant factor. Your score will be affected negatively if you have paid bills late, had an account referred to collections, or declared bankruptcy.
- Do you have outstanding debt: Scoring models evaluate the amount of debt you have compared to your credit limits. If you owe is close to your credit limit this will have a negative effect on your score.
- How long is your credit history: Models consider the length of your credit record. An insufficient credit history may have an effect on your score, but that can be offset by other factors, such as timely payments and low balances.
- Have you applied for new credit recently: Scoring models consider whether you have applied for credit recently by looking at “inquiries” on your credit report when you apply for credit. If you have applied for too many new accounts recently, this will negatively affect your score. However, not all inquiries are counted. Inquiries by creditors who are monitoring your account or looking at credit reports to make “prescreened” credit offers are not counted.
- How many and what types of credit accounts do you have: Although it is generally good to have established credit accounts, too many credit card accounts may have a negative effect on your score. In addition, many models consider the type of credit accounts you have. For example, under some scoring models, loans from finance companies may negatively affect your credit score.