There are a lot of fallacies regarding Credit Reports and Credit Scores, and I am sure that you can all tell me at least 2 different ones.
Did you hear the one about?
“When I turn 35 years old, my debts are wiped clean”
“When I apply for new credit it won’t affect my credit score”
“The more debt I have, the better my score”
“My credit score is only affected by my payment history”
Well, let’s try and dispel some of the fallacies with a few facts...
1. What is a Credit Report?
2. What your Credit Report reveals about you
3. Getting a copy of your Credit Report
4. What is a Credit Score?
5. How is my Credit Score calculated?
6. How to keep a good Credit Score
7. What can happen when your payments are overdue
8. Why you should review your Credit Report
9. Inaccurate and incorrect information
10. Co – signed debts
11. Facts & Fallacies
Attachment 1 - Sample letter for requesting a credit report
Attachment 2 - Sample dispute letter
1. What is a Credit Report?
There are 2 types of Credit Reports:
1. Investigative Credit Report
An Investigative Credit Report may be requested on you, usually by the following:
• Mortgage
• Insurance providers
This report contains much more detailed information on you.
Should an Investigative Credit Report be requested for you, the credit bureau MUST inform you directly and you have the right to add your comments to the report, before it forwarded to the requestor.
If you require any further information about Investigative Credit Reports, then please email me directly on: education@federatedfinancial.org and I will be pleased to deal with your request.
2. Consumer Credit Report
It is the Consumer Credit Report that we are discussing in this issue.
A Consumer Credit Report details, in depth information about your credit history, and will also include:
- your full name
- Any alias’s that you have used
- Social Security Number
- Current address
- Previous addresses.
Your Credit Report may also contain:
- Your phone number
- Age/date of birth
- Your employer’s details.
Your Credit Report should not contain:
- Race
- Color
- Sex
- National origin
- Martial status
- Political persuasion
Creditors, insurance providers, employers and any other person you authorize have access to it.
Your Credit Report reveals your Credit Score (see section 4 – What is a Credit Score?)
2. What your Credit Report reveals about you
There are 4 main areas:
• Your level of debt
– How much money you owe to individual creditors (including mortgages, car payments etc)
• Your bill-paying habits
– Did and do you pay on time, do you have delinquent accounts, did the creditor send your account to a collection agency and have you filed for bankruptcy.
• Length of credit
– How long have you had credit, obviously a 20 year old has a shorter length of credit history than a 30 year old
• Inquires made about you
– How many credit applications you have made, irrespective of whether you obtain the credit, it is the number of times you applied that is detailed here and don’t forget, this includes those made by insurance providers and employers.
Each of the 3 credit bureaus report the above information in a different ways, so you need to review the individual reports carefully, in order to ensure accurate information is documented.
This information will stay on your credit report for 7 years, from the date of the last activity.
If you file for chapter 7 bankruptcy, this will stay on your credit report for 10 years and it is also on your public records, which every body has access to.
3. Getting a copy of your Credit Report
I am sure that you have all been inundated with offers of a “free credit report” either through email, phone calls or the good old fashioned US Mail.
The best 2 ways to get your credit report are:
1. Obtaining via the Internet
- Be careful of which service you order through, they may charge you for the service or they may state the service is free, however, even if it is free, they will ask you for your credit card details and then you need to remember to cancel this within 30 days or you will be charged for the service.
- One advantage of obtaining your credit report this way, is that you may get direct access to it either via the web site or be having it emailed directly to you.
2. In writing a letter directly to the credit bureaus.
- You need to include the following information:
i. Your name full name (Sr., Jr., III etc)
ii. Any aliases that you have used
iii. Current and past addresses for the last 5 years
iv. Social Security number
v. Birth date
vi. Telephone number
- Your credit reports will be mailed to you and may take up to 6 weeks to arrive.
Which ever way you prefer, you must obtain a copy from all 3 credit bureaus:
Equifax - http://www.equifax.com
call: 800-685-1111 or write:
P.O. Box 740241, Atlanta, GA 30374-0241
Experian - http://www.experian.com
call: 888-EXPERIAN (397-3742) or write:
P.O. Box 2002, Allen TX 75013
Trans Union - http://www.transunion.com
call: 800-888-4213 or write:
P.O. Box 1000, Chester, PA 19022
The reason for this is simple, different creditors report to different bureaus and so each report may contain different information about your history, by getting a copy for all 3 credit bureaus, you will get the full picture of what is being reported about you.
If you purchase a credit report, the price is set by law and will not exceed $9.50. However depending on what other services you purchase with your credit report, the price can vary significantly, so please shop around.
In December 2004 laws were passed which allow you to obtain 1 free copy of your credit report each year. However, this has not yet become active in all 50 states and you will need to check with your own state to see if you are eligible.
For more information visit http://www.annualcreditreport.com
Until these are available in all states, you are allowed a free credit report if the following applies:
• You’ve been denied credit, insurance or employment within the last 60 days
• You’re on welfare
• Your credit is inaccurate because of fraud
Please keep in mind; your free copy does not necessarily include your Credit Score!!!
4. What is a Credit Score?
Your Credit Score is a number between 300 and 900. 900 being the highest score possible and also extremely rare to have.
The 3 credit bureaus use their own ranges within the 300 – 900. This will be documented on your credit report.
Basically, the higher the score the better you are.
What is the average credit score for Americans? Good question!! The answer depends on who you ask, let’s look at the following scores taken from web sites during April 2005:
www.myfico.com state that the median credit score in America is 723
www.nationalscore.com state that the average credit score in America is 676
www.bankrate.com state the average credit score in America is 676
Below is an example of how your credit score can affect your payments, this is for a $150,000 loan over a 30 year fixed mortgage:
Credit Score Range within: Interest Montly Payment
720 – 850 5.87% $887
500 – 559 9.29% $1238
5. How is my Credit Score calculated?
Now that is the million-dollar question...
Scores are computed using a formula, designed and sold to credit bureaus by FICO.
To find out more on FICO visit http://www.myfico.com
There are theories as to what affects or does not affect your score but no one, especially FICO, will give you the formula, so in reality it is any ones best guess.
Your score considers both positive and negative information in your credit report.
The things that we know that make up your score are shown in the following graph:
Payment History – 35%
• Account payment information on specific types of accounts (credit cards, retail accounts, installment loans, finance company accounts, mortgage, etc.)
• Presence of adverse public records (bankruptcy, judgments, suits, liens, wage attachments, etc.), collection items, and/or delinquency (past due items)
• Severity of delinquency (how long past due)
• Amount past due on delinquent accounts or collection items
• Time since past due items (delinquency), adverse public records (if any), or collection items (if any)
• Number of past due items on file
• Number of accounts paid as agreed
Amounts Owed – 30%
• Amount owing on accounts
• Amount owing on specific types of accounts
• Lack of a specific type of balance, in some cases
• Number of accounts with balances
• Proportion of credit lines used (proportion of balances to total credit limits on certain types of revolving accounts)
• Proportion of installment loan amounts still owing (proportion of balance to original loan amount on certain types of installment loans)
Length of Credit History – 15%
• Time since accounts opened
• Time since accounts opened, by specific type of account
• Time since account activity
New Credit – 10%
• Number of recently opened accounts, and proportion of accounts that are recently opened, by type of account
• Number of recent credit inquiries
• Time since recent account opening(s), by type of account
• Time since credit inquiry(s)
• Re-establishment of positive credit history following past payment problems
Types of Credit Used – 10%
• Number of (presence, prevalence, and recent information on) various types of accounts (credit cards, retail accounts, installment loans, mortgage, consumer finance accounts, etc.)
Please note that:
• A score takes into consideration all these categories of information.
No one piece of information or factor alone will determine your score.
• The importance of any factor depends on the overall information in your credit report.
For some people, a given factor may be more important than for someone else with a different credit history. In addition, as the information in your credit report changes, so does the importance of any factor in determining your score.
• Your FICO score only looks at information in your credit report.
However, lenders look at many things when making a credit decision including your income, how long you have worked at your present job and the kind of credit you are requesting.
• Late payments will lower your score, but establishing or re-establishing a good track record of making payments on time will raise your score.
6. How to keep a good credit score
Below are some ways to help you keep a good score:
• Pay your bills on time
• Keep your Debt-to-Income level low, read June’s editions of Federated Financial Debt End on “Debt-to-Income Ratio”.
• Dispute all negative information
• Correct inaccurate information
• Correct all inaccuracies in all 3 credit bureaus
• Make sure all old accounts are closed at YOUR request
• Request that all missing positive information credit information be included in your report
• Notify in writing your creditors of any change of address
• Fill out credit applications all the same
• Review your credit report at least once per year
7. What can happen when your payments are overdue?
Time Action
Early stage
Up-to 59 days past due
Customer is notified that another payment is due; account needs to be brought current.
• Customer telephoned for immediate arrangement
• Typically one day is allowed after leaving message for customer before follow-up phone call.
• Initial derogatory report made to credit bureaus anywhere from 31st to 61st day of delinquency, depending on creditor policy
Mid stage
60-119 days past due
Advanced delinquency procedures begin:
• Account closed or credit line suspended; ongoing derogatory reporting.
• Customer notified.
• Notice of default and chance to fix the situation sent to customer.
Late stage
Over 120 days past due
Actions of last resort undertaken:
• Ongoing derogatory reporting; balance is accelerated and payable in full.
• Third-party collectors often take over the account from the creditor.
• Legal proceedings are initiated for judgments; possession; execution; garnishment, etc.
8. Why you should review your credit report
Even though the creditors put the information onto your report, you are still responsible for ensuring the accuracy – yes, I know, that doesn’t seem to be fair, but unfortunately it’s a fact, so you need to review your credit reports at least once per year, if not more frequently.
Recently after doing just a small survey, we found that over 80% of the people sampled had either incorrect or inaccurate information on their credit reports, so it can happen to you.
• Mistakes are made, everyone is human and so your credit report may contain incorrect and/or inaccurate information about you, by someone making a processing or typographical error.
• It can also help identity if you have been a victim of Identity Theft; February’s edition of Federated Financials Debt End covered this fast growing crime.
• Your report may show that you have accounts on there that you know are paid; yet they are still reporting a balance.
9. Incorrect and inaccurate information on your credit report
OK, you have got your credit reports and surprisingly your credit report contains either inaccurate or incorrect information, what do you need to do?
1. In writing, keeping a copy for your records, notify all 3 credit bureaus, detailing what is inaccurate/incorrect and why, you will need to provide evidence/proof to verify your claim.
2. The credit bureau has 30 days to investigate and respond to you. Information that cannot be substantiated must be removed.
3. If the disputed information is confirmed as accurate, you can include an explanation to be included in your credit report.
REMEMBER: it is your responsibility to have the information corrected.
10. Co-signed debts
“Am I responsible if I co-sign a debt?”
If you replied YES, then you are correct.
In addition, lenders may consider co-signed amounts when calculating your debt-to-income ratio before extending YOU more credit.
If the person does not pay the debt:
• Then the creditor has the legal right to come after for payment.
If a co-signed debt goes to collection:
• A collection agency may try to collect the debt from you
• Institutions can sue you and get a judgment against you for the debt, plus interest and legal fees.
If the person files bankruptcy:
• The co-signed debt cannot be part of the person’s bankruptcy application and you become totally responsible for the full repayment of the debt.
Still want to co-sign??
Again, I think we all know several stories of sisters co-signing for brothers, husbands co-signing for wives and friends co-signing for friends, all of whom have been left to repay the debt.
The best advise - don’t do it
12. Facts & Fallacies
FACT: Your score is not affected when you check your credit.
1. Fallacy: My score determines whether or not I get credit.
Fact: Lenders use a number of facts to make credit decisions, including your FICO score. Lenders look at information such as the amount of debt you can reasonably handle given your income, your employment history, and your credit history. Based on their perception of this information, as well as their specific underwriting policies, lenders may extend credit to you although your score is low, or decline your request for credit although your score is high.
2. Fallacy: A poor score will haunt me forever.
Fact: Just the opposite is true. A score is a “snapshot” of your risk at a particular point in time. It changes as new information is added to your bank and credit bureau files. Scores change gradually as you change the way you handle credit. For example, past credit problems impact your score less as time passes. Lenders request a current score when you submit a credit application, so they have the most recent information available. Therefore by taking the time to improve your score, you can qualify for more favorable interest rates.
3. Fallacy: Credit scoring is unfair to minorities.
Fact: Scoring considers only credit-related information. Factors like gender, race, nationality and marital status are not included. In fact, the Equal Credit Opportunity Act (ECOA) prohibits lenders from considering this type of information when issuing credit. Independent research has been done to make sure that credit scoring is not unfair to minorities or people with little credit history. Scoring has proven to be an accurate and consistent measure of repayment for all people who have some credit history. In other words, at a given score, non-minority and minority applicants are equally likely to pay as agreed.
4. Fallacy: Credit scoring infringes on my privacy.
Fact: Credit scoring evaluates the same information lenders already look at - the credit bureau report, credit application and/or your bank file. A score is simply a numeric summary of that information. Lenders using scoring sometimes ask for less information - fewer questions on the application form, for example.
5. Fallacy: My score will drop if I apply for new credit.
Fact: If it does, it probably won't drop much. If you apply for several credit cards within a short period of time, multiple requests for your credit report information (called “inquiries”) will appear on your report. Looking for new credit can equate with higher risk, but most credit scores are not affected by multiple inquiries from auto or mortgage lenders within a short period of time. Typically, these are treated as a single inquiry and will have little impact on the credit score.
Attachment 1 – Sample letter for requesting credit report
MY NAME
MY ADDRESS
MY PHONE NUMBER
SEND 1 COPY TO ALL 3 CREDIT BUREAUS:
DATE
Dear Sir/Madam,
REQUEST FOR CREDIT REPORT
Please provide one FREE copy of my credit report.
Name/s:
Addresses:
Telephone Number:
Date of Birth
SS#
Yours truly,
SIGNATURE
NAME
Attachment 2 – Sample dispute letter
Date
Your Name
Your Address
Your City, State, Zip Code
Complaint Department Name of Credit Reporting Agency Address City, State, Zip Code
Dear Sir or Madam:
I am writing to dispute the following information in my file. The items I dispute are also encircled on the attached copy of the report I received. (Identify item(s) disputed by name of source, such as creditors or tax court, and identify type of item, such as credit account, judgment, etc.)
This item is (inaccurate or incomplete) because (describe what is inaccurate or incomplete and why). I am requesting that the item be deleted (or request another specific change) to correct the information.
Enclosed are copies of (use this sentence if applicable and describe any enclosed documentation, such as payment records, court documents) supporting my position. Please reinvestigate this (these) matter(s) and (delete or correct) the disputed item(s) as soon as possible.
Sincerely,
Your name
Enclosures: (List what you are enclosing)
Tom Gohring's School of Tai Chi and Chinese Kung Fu
6611 Airport Blvd., Austin, TX 78752 • 512-422-4245 • www.taichitom.com
