Financial Advice

Understand Your Credit

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Understanding Your Credit Report

A Consumer Credit Report is a factual record of an individual's credit payment history. It is provided for purposes permitted by law, primarily to help a lender quickly and objectively decide whether to grant you credit. Examples of credit include car loans, credit cards and home mortgages.

What does a typical credit report include?

  • Your name, current and previous addresses, phone numbers, Social Security number, date of birth, and current and previous employers. This information comes from your credit applications, so its accuracy depends on your filling out the forms clearly, completely, and consistently each time you apply for credit.
  • Specific information about each account such as the date opened, credit limit or loan amount, balance, monthly payment, and payment pattern during the past several years. This information comes from companies that do business with you.
  • Federal district bankruptcy records, state and county court record of tax liens and monetary judgments, and, in some states, overdue child support. This information comes from public records.
  • The names of those who have obtained a copy of your credit report. This information comes from the credit reporting agency.

Credit reports do not contain data about race, religious preferences, medical history, income, personal lifestyles, political preferences, medical history, friends, criminal record, or any other information unrelated to credit.

Credit reports may also include a credit score that lenders may use to make loan decisions and assign rates. We'll discuss credit scores a little later.

How do credit-reporting agencies compile credit reports?

Every credit report is custom made. When a credit grantor requests a credit report on a specific consumer, the credit-reporting agency collects information about the consumer from various portions of its computerized database.

For example, when John Q. Consumer comes to UFCU for a car loan, the loan officer may request a credit report by giving the credit reporting agency specific information from John's credit application; full name, full address, Social Security number, and date of birth.

The credit reporting agency uses information to search its database for all relevant data reported about John, credit and identification information from lenders, public record data from the court systems, and the credit agency's own records of who has received a recent copy of John's credit report.

In a very short period of time, the credit reporting agency compiles the information into a single report and transmits the report back to UFCU. At that point, the credit reporting agency's job is done.

What do lenders do with the credit report?

Credit reporting agencies provide data to credit grantors at their request. The role of the lender is to make lending decisions. In making their lending decisions, credit grantors often look at factors such as how long you've lived at the same address, the amount of your unused credit, and your past credit history. Different lenders may use different pieces of information to make their decisions or make different decisions based on exactly the same information. In fact, the same lender may change its decision criteria over time. Only the individual lender knows the reasons for granting or denying credit. However, there are laws that protect consumers from discriminatory lending practices.

How long does negative information stay on a credit report?

Federal law specifies how long negative information may remain on your credit report.

To prevent past errors from haunting you forever, most negative information must be erased after seven years. This includes late payments, accounts that the credit grantor turned over to a collection agency and judgments filed against you in court - even if you later pay the account in full. The length of time a bankruptcy remains on your credit report depends upon which type you file.

  • Chapter 7 - 10 years
  • Chapter 11 - 10 years
  • Chapter 12 - 7 years
  • Chapter 13 - 7 years

Credit reporting agencies use the date of original delinquency or, in the case of public records, the date of filing to determine when negative information is deleted. Positive information remains on your credit report indefinitely.

Will a poor credit record ruin my chances for a mortgage?

Yes, poor credit records will greatly lessen your chances of obtaining a mortgage. According to a recent survey by Fannie Mae, a government-chartered company that provides lenders funds to make mortgages, most American's don't understand the link between their credit records and their chance of obtaining a home mortgage. Just 41% of Americans say that being more than 90 days late paying utility bills three times or more in recent years would be a major problem for obtaining a home mortgage. Thirty-two percent say it would only be a minor problem, and 18% say it wouldn't be a problem at all. The truth is that any late payments reported to credit bureaus harm your ability to obtain loans at favorable rates if at all.

Can I remove accurate negative information from my report?

No one can legally remove accurate information from a credit report. Only time can erase bad credit.

How does consumer credit reporting help you?

Before the advent of national credit reporting agencies, consumers could obtain credit only in communities in which they were known and had lived for years. If they moved to another town where they were unknown, credit was virtually unobtainable.

Now, automated credit reporting systems enable a consumer's good credit reputation to make credit possible no matter where that consumer decides to live.

Because of automated credit reporting agencies, Americans enjoy the widest access to credit at the lowest interest rates in the world. Credit information enables lenders to either avoid consumers who don't pay their bills or to lend to them on special terms. Credit losses, which ultimately get passed on to consumers who do pay their bills, are therefore minimized.

Credit reporting agencies also foster intense marketing battles among financial services providers. This competition brings you reduced annual fees, special toll-free customer service phone numbers, customer recognition and incentive programs, and purchase protection plans.

Is my credit report protected?

Enacted by the U.S. Congress in 1970 and amended in 1996, the Fair Credit Reporting Act (FCRA) protects your rights as a credit-active consumer by limiting access to your credit report. You may request a copy, but no one else may legally review your report without permissible purpose, like:

  • in connection with your application for a government license
  • to manage the risk of potential or current credit, investment or insurance accounts
  • for employment purposes such as hiring or promotion
  • in response to a court order or federal grand jury subpoena
  • in accordance with your written instructions
  • in connection with an FBI investigation of issues such as counterintelligence

Anyone who knowingly and willfully obtains a credit report under false pretenses may be fined and imprisoned.

The FCRA also includes these consumer protections:

  • To prevent past troubles from haunting you forever, most negative information must be erased after seven years. Bankruptcies remain no more than 10 years. Credit reporting agencies use the date of original delinquency or, in the case of public records, the date of filing to determine when negative information is deleted.
  • You may obtain a free copy of your credit report if you ask for it within 60 days of being denied credit, insurance, employment or rental housing based on information in the report. Or, you may get a copy if you suffer an "adverse action" such as decreases in your credit limit or increased interest rate.
  • When credit is denied based on information in a credit report, the credit grantor must tell you the name and address of the credit bureau that supplied the report and, upon written request, the reason for the denial.
  • If you dispute the accuracy of information in your credit report, the credit-reporting agency must investigate within 30 days.
  • Your report must reveal who has received a copy within the past two years for employment purposes or within the past year for any other purpose.

What is in my credit report?

Your credit report is actually a credit history. It is created by data about you from many different sources. Companies that have granted you credit make regular reports about your accounts to the three main CRAs: Equifax, Experian (formerly TRW), and TransUnion. If you are late in making payments, those to whom you owe money such as utilities, hospitals, landlords and others may report this information to the CRA. Your bank may inform the CRA if you overdraw your account or do not make credit card, auto loans, or mortgage payments on time. Your credit report may also contain information about delinquent child support payments.

The FCRA allows CRAs to report records of convictions of crime. However, it is not the practice of any of the three main CRAs to report criminal convictions on credit reports. Such information may, however, be reported in connection with an employer background check, an application for automobile insurance, or an application to rent a house or apartment. For more on these types of consumer reports, see "Background Check Basics" at the Privacy Rights Clearinghouse.

In addition, your credit report contains your name and any name variations, your address, and previous addresses, telephone number (including unlisted number), Social Security number, year and month of birth, and employment information. Information in your report also includes matters of public record such as civil judgments, tax liens and bankruptcies. Because you have the right to know who has inquired about your credit file or has requested your report over the last six months, any copy of the report you receive must also include the identity of all such inquiries. Inquiries related to pre-approved offers, as well as your own inquiries, are not available to credit grantors. However, they are included in credit reports that you order for yourself.

How do credit scores affect my application? Can a credit reporting agency deny my application for credit?

CRAs do not make decisions regarding a consumer's creditworthiness. Rather, the CRA compiles reports of what your file contains and passes that along to the potential credit grantor. Credit decisions are, in fact, generally made based upon a number of factors that comprise a "score." Inquiries made in connection with your applications for credit may also be a factor in your score. If, for example, you have applied for several credit cards or loans in a short period of time, this may result in a lower score. Inquires made in connection with pre-approved credit offers or those you make yourself should not result in a reduced score.

The practice of credit scoring is widespread and growing. Until recently, consumers have seldom gained access to their credit score and have not been able to learn the factors that went into the scoring. But a recent law in California gives mortgage applicants a right to see their credit score (California Civil Code 1785.10, 1785.15-1780.20, SB 1607 in the 2000 legislative session). And the credit industry is voluntarily loosening its grip on the credit score because of legislative and marketplace pressures.

To learn more about the topic of credit scoring, see the Federal Trade Commission's (FTC) information at http://www.ftc.gov/bcp/menus/consumer/credit/reports.shtm. Additional information can be found at the FICO website (www.fico.com). FICO is the leading developer of scoring methodology. The credit score is often called a "FICO." The most recent changes to the FCRA give you new rights to know your credit score as well as an explanation of the factors that determined the score.