Credit Reporting 101

Let's take on the fundamentals of the credit reporting system. From the big three credit bureaus, TransUnion, Equifax and Experian, to your rights under the Fair Credit Reporting Act, this article will help you navigate the credit report maze.

The credit reporting agencies - TransUnion, Equifax and Experian (formerly TRW) are the three national credit reporting agencies that keep records on consumers. The reporting agencies work with lenders, creditors, insurers and employers to update and distribute your information to the appropriate institutions. Here's an example of how the system works:

1. When you apply for a new credit card the creditor requests a copy of your financial history from the reporting agencies. This causes a "hard inquiry" to be recorded on your credit report.

2. The creditor uses your credit reports and scores along with income and debt information to determine what rates to offer.

3. You start to use the new credit card and the creditor reports your activities to the credit reporting agencies about every 30 days.

4. The credit reporting agencies update your credit report as they receive new information from creditors or lenders.

5. Your credit profile changes based on your financial activity. The next time you apply for a credit card or loan, the process repeats.

Your credit report - Your credit report is divided into six main sections: consumer information (address, birthday and employment), consumer statement, account histories, public records, inquiries and creditor contacts. When you open a new account, miss a payment or move, these sections are updated with new information. Old negative records will stay on your credit report for 7-10 years. Positive records can remain on your credit report longer. Not all creditors report to all three agencies and the agencies obtain their data independently so your reports from TransUnion, Equifax and Experian could be substantially different from each other. That's why it's important to check your three credit reports every 6-12 months to ensure that the information is accurate and up-to-date.

Correcting inaccuracies - Under the Fair Credit Reporting Act, consumers are protected from having inaccurate information on their credit reports. If you find an inaccurate record on your report, try contacting the creditor or lender associated with the mark first. These companies can usually correct the mistake and send an update to the credit reporting agencies. If you can't make progress this way, you can also dispute the inaccuracy directly with the credit reporting agencies.

Working the system - Managing your credit and maintaing a good credit history can lead to better rates on major purchases. We recommend that you check your credit reports every 6-12 months or at least 3 months before a major purchase in order to guard against damaging inaccuracies and identity theft. Routine check-ups along with paying your bills on time, keeping your credit card balances below 35% of their limits and correcting any negative inaccuracies will help you maintain a healthy credit profile.

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Are banks the only ones looking at my FICO score, and do they have to pay the same fee I do?

No and no. The sites show a scale of interest rates for different types of loans, but did you know that your insurance agent also uses an insurance score to help determine your premiums? The Fair Isaac Company developed the first insurance scoring model in 1998 and there have been some updates since then. Concrete information on this subject is very sketchy, but my personal insurance agent told me that home owners' policies cost up to 40% more if your credit is in the toilet, but vehicle insurance premiums more than double with bottom-of-the-barrel credit scores. I asked if I could get a table with this information and was told that I couldn't. Farmer's Insurance is not using the FICO score specifically, but they do have a score-based model that uses credit report data.

Employers are relying more on credit scores for hiring decisions and for promotions, but it doesn't stop there. Many utility companies will require a deposit prior to connecting service and some are using your credit score to determine your kilowatt/hour RATE! Just imagine, you might be paying more for electricity soon based on a low credit score.

I'm sure that no one is surprised to find that banks and insurance companies pay a fraction of what you pay to get the same information. On Myfico.com you will pay $15.95 to get FICO Standard, which only provides scores and bureau information for Equifax and Trans Union. Due to an on-going law suit between Fair Isaac and Experian, you cannot purchase your Experian FICO score at Myfico.com. As a national mortgage lender, we can purchase all three FICO scores with the matching bureaus for $9.86. I'm sure the big banks get an even better discount.

Understanding Your Credit Report

A credit report contains all your information that is reported to the three credit bureaus. The three credit bureaus are Experian located in Chester, PA; Equifax located in Atlanta, GA; and Equifax located in Allen, TX. The information reported to the credit bureaus is your payment history that contains the following information:

Personal Information - the personal information on the credit report lists the basic information about the individual. None of the information listed in the personal information effects the credit score calculation. The personal information on the credit report contains any name used, birth name, AKA or any name the creditor has used when applying for credit. The date of birth, current and previous address, employment history, and the dates the information was reported are also listed, credit report.

Summary - the summary section of the credit report contains a categorized list of all the accounts on the credit report. This synopsis allows the viewer a quick review of the credit report and compares the data that is reported to the three credit bureaus.

Account History - The account history on the credit report contains all the account a person has open or closed. This section has credit history of your payments. Each of the account will contain: Account Number, Account Type, Creditor Name, Monthly Payment, Highest Balance Owed, Credit Limit or Loan Amount, Date Open or Closed, Payment History, and if it is a joint or individual account.

Inquires - the credit report contains two types of inquires. The first type of inquire on the credit report is inquires where a business pulled the credit and the second type is when an individual applies for credit. When you apply for credit it remains on your credit report for two years. When you show a history of declined credit applications it makes you look desperate. More than likely a lender will not loan money to a desperate person. Multiple approved applications send a different message. When you're approved for a loan or a line of credit, the lender has made a commitment to loan you the funds. Your ability to repay these lines of credit and loans depends on your income. Your capacity to take on additional debt is diminished by the amount of debt or potential debt outstanding.

Public record information - Public records on a credit report may include information such as judgments, foreclosures, lawsuits, wage attachments, bankruptcies, state and federal tax liens, and past-due child support. This information is reported by county, state, and federal courts to a variety of credit reporting agencies. The agencies retain the information in a credit report and use the information along with other pertinent credit data to determine your credit score. Since public records reflect poorly on your credit rating, you'll want to make sure that this section of your report stays spotless. This information will remain on your credit report for seven years. However, if the record relates to bankruptcy, it will remain on your report for 10 years.

I am a member of the Financial Empowerment Network Team and Prime Financial Credit Services

Your Credit Score Is Yours to Control

Are you confused by credit, and how to create a better credit score? Don't feel bad, many consumers and business people find it hard to understand why their credit score is low. They pay their bills. And when they are a little late on a payment, they pay extra fees to the Lenders to make up for that. The Lenders enjoy great profits, and yet, the Borrower gets penalized more. Is it fair? I say NO! Enough! It's time for us to take control of our credit scores, and get them to reflect accurately, what kind of people we really are. In fact, the United States government agrees. Toady, there are laws to protect us, and allow us to take back control of our credit histories and credit scores.

Use these laws to make sure you aren't forced to pay more for auto loans, credit cards, mortgages, insurance and utilities. Besides costing you more money in monthly bills, we've been hearing more about people who get job offers that are later taken back, because of a "bad" credit score, a result of having been out of work for a year or longer. They didn't use credit to support a luxurious lifestyle. Ironically, they are penalized by taking away the very thing that they need to get back on their feet and to get back to paying their bills. Is it just me, or does it seem ridiculous to you as well? Credit reporting agencies, and Lenders, seem to believe that it's their right to penalize consumers to any level that they choose. The US government says it isn't their right. It is their right to report late payments and defaults on payment agreements, to the extent that they report it accurately. Is the information on your credit report accurate?

Frits Tessers is a member of the Financial Empowerment Network Team and Prime Financial Credit Services
you can also visit Personal Coaching for more information on Frits Tessers.