Your Credit Report and How It Works
If you want to get out of credit card debt without falling victim to fraud and credit-repair scams, you need to know what's on your credit report and why it's there, develop a plan to pay down debt, and change the way you use credit to avoid repeating the same problems.
The first step is finding out what your creditors are saying about you. A credit report is a record of your credit payment history as reported to credit bureaus by your bank, credit card companies, department stores, and other businesses you've borrowed from.
Potential lenders use the information in your credit report to decide whether they want to take the risk of issuing you credit. If you understand how credit reports work, you can protect your rights and avoid being taken advantage of by unscrupulous credit-repair clinics and so-called credit doctors.
If you're thinking about buying a house or applying for credit for any other big purchase, you'll need a good credit report. It's always best to know what's on it before your lender does, so you'll have an opportunity to clean up any discrepancies or errors.
Under the Fair Credit Reporting Act, you have specific rights related to your credit report. You can read about these rights on the Federal Trade Commission's website.
What's in a Credit Report?
Your credit report includes the following basic personal information: name, current and previous addresses, telephone number, social security number, date of birth, and current and previous employers. The credit history section includes information about each credit account, including the date opened, credit limit or loan amount, balance, monthly payment, and your payment pattern during the past several years.
Also included are bankruptcies, accounts sent to collection agencies, unpaid child support or alimony, tax liens, car repossessions, court records of tax liens and monetary judgments, and the names of businesses or individuals who have obtained a copy of your credit report.
In addition, your report contains information obtained from public records, such as your job history, whether you own your home, and whether you've been sued, arrested, or have filed for bankruptcy.
Your credit report does NOT include information about your race or national origin, religion, personal lifestyle, political affiliation, medical history, criminal record, or other information unrelated to your credit history and ability to repay debt.
When issues between you and a creditor can't be resolved, the comments and explanations you're allowed to add to your credit report and the creditor's response to your statements become part of your credit report.
If an account was turned over to a collection agency, your report will include it as a “collection account” until it's paid in full; then it will be noted as a “paid collection” and will stay on your credit report for seven years from the date of the first missed payment.
Review Your Credit Report
Financial advisors recommend that you obtain a copy of your credit report at least once a year and review it carefully. The Fair Credit Reporting Act allows you to get one free credit report from each credit-reporting company every year. If you've been turned down for credit, housing, or employment because of information in your report, you may be entitled to an additional free copy of your credit report.
Some states require that credit bureaus provide free copies or charge a reduced price for residents of that state, so you may find a variety of ways to get more than one free credit report per year from each of the credit-reporting companies.
There are three main credit bureaus: Equifax, Experian, and Trans Union. In addition, there are a number of smaller companies that collect specialized information — but the three companies listed above are by far the most important.
Because some creditors report to only one of the bureaus, the information in your credit report may differ somewhat from one bureau to the other; experts recommend that you obtain a copy of your report from each of the three major credit bureaus once a year. You can also order a three-in-one report that includes the information from all three credit bureaus. It may cost more than obtaining the individual reports, so you'll have to decide if it's worth the convenience.
To order your credit reports use the official site created by the three major credit-reporting companies: AnnualCreditReport.com. If you use a different site, it's likely that you won't get your credit reports for free. Many imposter sites claim to offer free reports and credit scores, but they will want a fee from you sooner or later.
If you find an error in your credit report, call or write to the credit bureau explaining the error in as much detail as possible in 100 words or less. Provide any documents that help prove your statements. Send everything certified mail, return receipt requested. If you don't get an answer within 40 days or so, follow up with them. You have to take ownership of the process and treat it like a project.
The Lifespan of Credit Information
Your payment history will follow you around for a long time. Chapter 7 bankruptcies stay on your credit report for ten years from the filing date; Chapter 13 bankruptcies remain for seven years from the date fully paid or ten years if not paid as agreed. Unpaid taxes can stay on your credit report until you pay them, and then they'll stay for at least seven years. Most other negative information stays on your report for seven years.
How Do Lenders Use the Credit Report?
Lenders use the information in your credit report to evaluate your character, your debt capacity, and your collateral or capital. Their evaluation of your character is based on the stability of your employment and residency history. How often have you changed jobs? How often have you moved and how long have you stayed at each address? This information gives lenders a feel for your personal stability.
To evaluate your debt capacity, lenders look at your living expenses, open credit limits, current debts, and other payments to get a sense of how much debt you can afford based on your spending habits, income, and credit burden. They're more likely to extend you credit that's secured by collateral or a down payment. For example, the car you purchase is the collateral for your car loan. If you default on the loan, the car can be repossessed, so there's less risk to the lender.
To get a copy of your credit report, visit AnnualCreditReport.com. This site was created by the three major credit-reporting companies in response to the Fair Credit Reporting Act. There, you can request a free credit report every year from each company.
Lenders don't always dig through your credit reports to get an idea of who you are. Increasingly, they base their lending decisions on your credit score, which is a number indicating how likely you are to make payments on time and repay loans, based on information in your credit history.
The score is computer-generated and largely based on your use of credit in the past — how long you've used credit, how much you use, and how responsibly you've used it. Some credit scores factor in a wealth of information in addition to the information in your credit reports (perhaps it's information you provide in a credit application, or information that the lender already has).
All in all, they may look at your income, education, job stability, how often you've moved, whether you own your own home, how often you take out cash advances, how close you are to your credit limits, what kinds of things you buy on credit, how many credit cards you have, and past payment history. A computer compares this information to patterns from thousands of other consumers and predicts your level of credit risk.
For a fee, you can now obtain your credit score, or FICO score, named after the Fair Isaac Corporation, the company that developed credit scoring and the largest provider of credit scores to creditors and financial institutions. While there are other credit scores out there, the FICO credit score is most often used by lenders and others. All three major credit bureaus offer this option with your credit report or as a separate option.
If your credit score isn't exactly stellar, do your best to improve your score by concentrating on paying your bills on time, paying down your loan and credit card balances, and avoiding new debt. It can take considerable time to improve your credit score but is well worth the effort. To get your FICO score directly from Fair Isaac, visit myFico.com. Their website also provides details on how the score is composed, and what you can do to improve it.