You are the source of great interest and profit for many national companies. These companies, known as “consumer reporting agencies” under the Fair Credit Reporting Act, gather financial and personal information about you and millions of other consumers across the country. They use this information to make a profit – that’s right; they sell your information to make a buck. The FCRA defines a consumer-reporting agency as: Any person which, for monetary fees, dues, or on a cooperative nonprofit basis, regularly engages in whole or in part in the practice of assembling or evaluating customer credit information or other information on consumers for the purpose of furnishing consumer reports to third parties, and which uses any means or facility of interstate commerce for the purpose of preparing or furnishing consumer reports. These consumer-reporting agencies sell your information to businesses and individuals with a “legitimate” need to know something about you. Most often, these businesses are creditors that want to lend you money or otherwise provide you with credit. But, the consumer reporting agencies have many customers that are eager for your information, including prospective employers, landlords, and insurance companies. All of these businesses and individuals are trying to decide whether you’re a “good risk” for whatever it is they’re offering to you. If your credit report contains mostly “good” information, then you’ll probably receive the loan or service. But, if your credit report contains mostly “bad” information, then you’re probably not going to get the loan or service. We’re going to closely examine the information that’s contained in your credit reports in a moment, and then we’re going to talk about how to fix that information. But for now, let’s take a close look at the major consumer reporting agencies. There are currently three major credit bureaus (consumer reporting agencies) that collect, maintain and report general credit information regarding consumers– Equifax, Experian (formerly TRW), and TransUnion. These companies now each maintain credit information on more than 200 million consumers nationwide.
This section has identifying and employment information. It could include full name, spouses name, current and former address, date of birth, current and former employers. Although the personal data section does not directly affect the credit score, it is important that this section is correct for identifying purposes. Suffixes, such as Sr., Jr., III etc., often get mixed up. Father and son with the same name will often get their information reported on each other’s credit reports.
The public information section of the credit report includes publicly available information about legal matters affecting your client’s credit. This could include judgments in civil actions, state or federal tax liens and bankruptcies. All court records, including satisfactions, are considered negative by all credit grantors.
This includes credit cards, auto loans, mortgages, real estate, installment loans and revolving debt like department store cards. The report will include information on the accounts such as the balance, payment history, terms, and account status such as whether the account was put into bankruptcy, charged off, or repossessed.
Collections are accounts that are seriously past due and have been transferred to a collection agency or creditor's internal collection department. Collections can appear to be paid and unpaid (and, yes this makes a difference when disputing...more on this later). Any type of collection whether it is paid or unpaid it is negative. One thing you may encounter is multiple listings on credit reports for the same debt. This happens as the debt collection agencies sell the debt to other agencies. As debt is transferred between different agencies, there may be several records on the credit report for the same debt. Only one record should be marked as open at a time on the credit report.
Every time credit is applied for, a credit report is pulled. The inquiry section of a credit report includes records of businesses that have checked your credit in the last two years. When creditors and lenders review clients’ credit data for the purpose of an application, a hard inquiry is listed on the credit report. Too many hard inquiries can harm a credit score. The reason being is that credit grantors get nervous that they are not managing credit “responsibly.”
Contrary to popular belief, your credit report does not contain information about your checking or savings accounts, or your race, religion, gender, political affiliation, or personal lifestyle. Your credit report also does not contain medical history or criminal records. But, remember, your credit report is only one type of consumer report. As we've seen, there are specialized consumer reporting agencies that DO collect, maintain, and report some of this information). In addition, there are companies that provide what the FCRA calls an “investigative consumer report” which it defines as: A consumer report or portion thereof in which information on a consumer's character, general reputation, personal characteristics, or mode of living is obtained through personal interviews with neighbors, friends, or associates of the consumer reported on or with others with whom he is acquainted or who may have knowledge concerning any such items of information. Fortunately, the FCRA requires that these companies notify you if they prepare an investigative consumer report about you. Although this is something to certainly worry about, let's stay focused on credit reports for now. Just remember that credit reports and investigative consumer reports are completely different. Finally, your credit report might also not contain information from all of your creditors. As we talked about above, some of your creditors may not report to all of the credit bureaus, and some may not report to any credit bureau. Therefore, parts of your credit accounts and history may appear in different credit reports, or not at all.
Now that you know who creates the credit reports, let’s talk about where the information comes from.
Yes, you! You unknowingly supply a great deal of information to the credit bureaus. How? Generally this happens when you apply for credit. When you apply for credit, you typically complete a credit application in which you supply your full name, Social Security Number, current and former addresses, and current and previous employment. And guess what your potential creditor does with the information you listed in the application? That’s right. They send it all to the credit bureaus. This information then becomes a part of your credit file. Therefore, it’s important that you accurately complete this information on any credit applications the same way EVERY TIME!
Your current and former creditors also provide information to the credit bureaus about you. These creditors tell the credit bureaus how you’ve paid your bills each month. But, not all of your creditors report all of your payment history to the credit bureaus. Most creditors, sometimes called “automatic subscribers,” report all of your payment history to the credit bureaus every month. Other creditors, sometimes called “limited subscribers” only report certain types of information – like delinquencies.
Automatic Subscribers are creditors that regularly report information to the credit bureaus about your account with them. This information generally includes the date when this creditor opened the account, the total amount of the debt or credit limit, the current balance, and your payment history – good or bad. Just because a creditor is an automatic subscriber to one credit bureau, doesn’t necessarily mean that the creditor will report to all of the major credit bureaus. That’s one reason that the credit reports produced by different credit bureaus very often contain different information.
Limited Subscribers are creditors that do NOT regularly report information to the credit bureaus. Instead, these creditors may only report certain types of information – like delinquencies or collection activities. They generally do not report good credit information, usually just bad information. There are many different types of limited subscribers, including apartment management companies, insurance companies, utility companies, medical providers, and collection agencies. As with automatic subscribers, many limited subscribers may only report information to one of the national credit bureaus. Therefore, bad information reported by a limited subscriber may only affect one of your credit reports.
Finally, there are some creditors that do not report to the credit bureaus AT ALL. This means that any information – good or bad – will not show in any of your credit reports. Typically, these creditors include individuals, like landlords, or small companies. (When you’re trying to improve your credit, you need to be aware of creditors that do not report to the credit bureaus. These creditors will NOT help you to restore your credit.)
Under section 604 of the FCRA (15 U.S.C. section1681b), only certain people may access your credit report, and then only for certain specified reasons. Generally, this means prospective creditors. However, there are many reasons that someone may access your credit report. For example, with restrictions, a potential employer may access your credit report when you apply for job. To get a sense for this, let’s look at the list of “Permissible Purposes of Consumer Reports” as set forth in section 604 of the FCRA to find out who can see your credit report. 1. A court or federal grand jury; 2. You; 3. Someone (a creditor) that intends to use the information in connection with a credit transaction; 4. Other individuals or companies that intend to use the information in connection with employment, the underwriting of insurance, or certain government benefits; 5. Other individuals or companies that have a legitimate business need for the information in connection with a business transaction initiated by you; 6. A state or local child support enforcement agency; 7. An agency administering a State plan under section 454 of the Social Security act to set an initial or modified child support award.
A credit score is a number that attempts to predict your “credit-worthiness” at any given moment. Officially, it’s supposed to predict how likely you are to become at least 90 days late on payments within the next twenty-four months. Credit scores are calculated using complex, secret formulas that are only known by the companies that produce them (although these companies have given us some general guidance on how they calculate credit scores.) A company called Fair Isaac Corporation pioneered the use of credit scores in 1956, but they didn’t become widely used by creditors until the 1980’s. Then, in 1995, Fannie Mae and Freddie Mac recommended the use of credit scores in mortgage lending. From then on, credit scores became perhaps the single-most important tool for creditors when offering loans to consumers. Now, credit scores are even used by insurance companies and other service providers in determining whether, and on what terms, they will offer their services to you. There are now many different types of credit scores, developed by different companies, for use in different industries. For example, there are credit scores that are used solely for automotive lenders, credit card issuers, or finance companies. Some commentators have suggested that, between the different credit scoring companies, there are more than 1000 different credit-scoring models currently in use. But, the most widely used credit score, by far, is the score developed by the Fair Isaac Company known as a “FICO” score. To determine a FICO score for a consumer, Fair Isaac developed a formula based on nearly forty different “characteristics” that it claims predicts the likelihood that the consumer will repay their debts. Fair Isaac also groups different classes of consumers according to key “attributes” and then compares a given consumer’s credit file to other consumers in that same group. For example, there may be a group of consumers who have filed for bankruptcy. There may be another group of consumers who have one late payment, and so on. Fair Isaac believes that separating consumers into groups of consumers with common key attributes makes the credit score even more predictive of credit worthiness. This system is called a “scorecard” system. But guess what? There’s more than one credit-scoring model. Sure, there are other companies that have their own credit scoring system (we’ll talk about that in a minute). But, even Fair Isaac has more than one credit-scoring model. In fact, they have many different credit scoring models. The most commonly used model is known as the “Classic” FICO scoring model. This model uses 10 “scorecards” or groups of people with similar key attributes. But, Fair Isaac has also developed another scoring model called “Next Generation” or “NextGen” that uses 18 scorecards or groups. Fair Isaac believes that the NextGen scoring model is even more advanced and predictive than the Classic model. In addition, Fair Isaac has developed enhancements to the Classic model. So, why should you care about this? Well, it’s a problem for us every day, because different creditors use different credit scoring models. Some may use the Classic FICO. Others may use the enhanced versions of the Classic FICO. Still others may use the NextGen FICO. And the result? Yes, that’s right, different scores. A lender may pull a credit score for a potential borrower, and get one score. But, if another lender uses a different credit reporting company for their credit report, it’s very possible that the credit score will be different. So, while the borrower would qualify for a certain loan based on one credit report and score, the borrower may NOT qualify using the other credit report.
Many people do not realize that they do not have only ONE credit score. In fact, you have many scores. You have a FICO score for each bureau, and different FICO credit scores are just the beginning. Adding to the confusion are “educational” scores that Experian, Equifax, and Trans Union offer to consumers through their web sites and through hundreds of affiliated companies. If you’ve visited the web site for Experian or Trans Union, you probably found it hard to JUST order your credit report. On both sites, it takes some real investigative work to figure out how you can avoid ordering a credit score or credit monitoring service with your credit report. But, you’re probably asking, is that a bad thing? After all, we said that credit scores are more important than credit reports, right? Well, yes, that’s true. But, you need the RIGHT credit scores. And the credit scores that Experian and Trans Union are pushing on their web sites are NOT the credit scores that they provide to third parties.
On their web site, Experian offers the “PLUS Score.” The PLUS Score is a proprietary score developed by Experian, and featured prominently in its web site. You really have to dig in the Experian web site to find out that the PLUS score is really an “educational” score. In its web site, Experian says “the PLUS score is derived from information based on a credit report, using a similar formula to those used by lenders.” Did you get that? The PLUS Score is a “similar” formula to those used by lenders. So, bottom line, it’s NOT the score that lenders use. It’s supposed to be “easier to understand” than other credit scores (the FICO scores) and allows consumers to “see how changes to their credit habits can directly influence their credit rating.” So again, it’s not the score that creditors use in granting you credit. It’s an educational tool to allow you to see how changes to your credit “habits” can affect your credit score. So, for “educational” purposes, the PLUS Score is OK.
What’s wrong with looking at the PLUS scores? After all, they’re educational, right? Well, yes, but.... If you want to spend your money, then go ahead. But, if you really want to see the scores that your lenders are going to see, then you need to stick with the FICO scores. Your lender will never see your PLUS Score or your TrueCredit score. And, in our experience, these scores are almost always considerably higher than the FICO scores based on the Experian and TransUnion credit information. We’ve seen differences of more than 50 points between these “educational” credit scores and the FICO scores. This usually comes up when a borrower starts complaining that the scores they got online were much higher than the scores received by a mortgage broker who pulled their credit. They usually think that the mortgage broker is trying to trick them in order to justify a higher rate. Although we have no doubt that this happens, generally the difference in scores is really the difference between the FICO scores and the educational scores. So, bottom line… make sure that you review and work on improving your FICO scores. It MAY help to pull the PLUS Score and TrueCredit Score and play with the simulators that Trans Union and Experian offer with these scores. But, to REALLY improve the credit scores that your lenders will use, you need to understand the FICO scoring system.
Fair Isaac and Vantage Score hold their credit scoring formulas as a close secret much like the formula for Coca-Cola or your grandma’s legendary double chocolate-chip cookies. This can be very frustrating for consumers when they see remarks on the credit report like “too many revolving debt accounts” and not knowing exactly that means. We will go over the scoring factors for your FICO score.
The top rated factor is payment history. This is because lenders want to know a person’s payment habits both past and present. This category can be broken down into three subcategories: Recency – This is the last time a payment was late. The more time that passes the better. Frequency – One late payment looks a heck of a lot better than a dozen lates in a row. Severity – This rests on the logic that a payment 30 days late is not as serious as a payment 60 or 120-days late. ALERT! REMEMBER - Collections, tax liens and bankruptcies are credit score killers.
The score looks at the total amount owed on all accounts as well as how much you owe on different types of accounts especially REVOLVING accounts. Using a higher percentage of the credit limits will worry lenders and hurt the credit score. People who max out their limits have a much greater risk of default. When it comes to revolving debt-credit cards, the formula looks at the difference between the high limit and balances. For Example, let’s say you have a MasterCard with a credit limit of $10,000 and you have spent $2,000 of it. This is a 20% utilization ratio. The lower the ratio, the higher the credit score. So, pay down any revolving accounts you can. Don’t expect this to be instantaneous as it can take up to 45 days for the bureaus to update reports.
This is less important than the previous factors, but it still matters. It considers (1) the age of the oldest account and (2) the average age of all your open accounts. It is possible to have a good score with a short history, but typically the longer the better. Young people, students, and others can still have high credit scores as long as the other factors are positive. If a person is new to credit then there is little they can do to improve a credit score. The only solution is to open an account and be patient.
Both models want to see a healthy mix of credit, but they are vague on what this means. They recommend you have a balance of both revolving debts like consumer credit cards and installment loans like auto loans or a mortgage. Usually, a good report will contain a mortgage, 1-2 auto loans, 3-5 credit cards, and some personal debt loans such as signature or student loans.
New credit is not always a bad thing. However, opening new accounts can hurt a credit score, particularly if a consumer applies for lots of credit in a short time and doesn’t have a long credit history. The score factors in the following: 1. How many accounts has the consumer applied for recently? 2. How many new accounts the consumer has opened? 3. How much time has passed since the consumer applied? 4. How much time has passed since the account was opened? The model looks for “rate shopping.” Shopping for a mortgage or an auto loan may cause multiple lenders to request your credit report many times each, even though a person is only looking for one loan. Auto dealers are notorious for running 3 to 15 credit reports. This is called shot gunning the credit. Luckily, to compensate for this, the score counts multiple inquiries in any 14-day period as just one inquiry. For most people, a credit inquiry will take less than five points off their score. However, inquiries can have a greater impact if you have few accounts or a short credit history. Large numbers of inquiries also mean greater risk. According to MyFico.com, people with six inquiries or more on their credit reports are eight times more likely to declare bankruptcy than people with no inquiries on their reports.