CREDIT REPORTS

When you walk into a dealership to buy a car, or approach your bank for auto financing, chances are they will be pulling your credit score to see what kind of borrower you are before they approve a loan, or quote you an interest rate. Credit scores, or FICO scores, are one of the primary tools used by lenders to try to assess the likelihood of your default on a loan, and whether you will make timely payments if they extend credit to you.

The credit bureaus keep an invisible paper trail of all of your account activity when it comes to credit and loans. When you make a payment on your credit card, or open a new account, this information is reported to the credit bureaus and added to your credit report. If you default on an account, or if you are habitually late on your payments, that is reported to the credit bureaus as well. Your three digit credit score is a summarization of the information on your credit report, and helps lenders to see at a glance what sort of history you have had with credit.

Your credit score, or FICO score, is a three-digit number that represents a statistical analysis of your creditworthiness. Your credit score is based on the information in your credit report, which is usually sourced from the three major credit bureaus. Using this score, lenders will determine the likelihood of your default on a loan, and whether you will make timely payments if they lend you money. The purpose of the three-digit score is to make that assessment easy to make, and understandable in comparison to the standing of other borrowers.

The information in your credit report reflects your bill-paying history and debt profile. If you are late on a payment by 30, 60, or 90 days, that will be noted in a credit report. If you default on a loan or a credit card, or if a bank has to “charge off” a debt that you incurred, those will be noted on the credit report as well. All of these factors will be analyzed when determining your three digit credit score.

There are three major consumer credit reporting bureaus – Equifax, Experian and TransUnion. The credit bureaus provide an important financial service for lenders and consumers by collecting and reporting consumer credit information. Lenders, credit card companies, insurers, landlords and utility companies all use the information provided by these agencies to make decisions about your creditworthiness as a borrower or customer.

The three major credit bureaus are separate agencies, and work independently of one another, each using their own systems to calculate three separate credit scores which may differ from one another. When reporting information to the credit bureaus, lenders must report to each one of the credit bureaus separately. Therefore, each credit bureau may have different information.

Wondering how your credit score measures up against the national average? You’re not alone. Many Americans do not even know their own score, much less how it compares to other borrowers. But your credit score falls into one of the following broad categories. A score of 750-840 is generally considered “Excellent” credit. A score of 660-749 is considered “Good” credit. 620-659 is “average” credit. Anything below that is considered “Poor” credit, and probably indicates that you have a history of late payments or other black marks on your credit report, such as an outstanding loan or default.

With most people’s scores falling somewhere between 500 and 850, you would assume that the average score was somewhere in the middle. However, you would be wrong about that. A surprising number of people have a score above 700, with the largest percentage – 27%, according to some estimates – between 750-799. So, according to most sources, Americans have pretty good credit – at least enough to qualify them for the best interest rates on mortgages and credit cards.

Your credit report is a record of information collected from your creditors, which summarizes your credit history. When you apply for the credit, your bank, credit card company or mortgage lender uses your credit report to evaluate the potential risk of lending money to you.

In your credit report, the lender will find out what credit card accounts and loans you have, whether they are in good standing, and whether you make payments on them in a timely manner. If any action has been taken against you because you didn’t pay your bills, or if a company had to charge off a debt that was not repaid by you, that will be on your credit report, too.

There are actually three different agencies, called credit bureaus, which collect this information from your creditors. The three major credit bureaus are Experian, Equifax, and Transunion. Since lenders supply this information separately to all three bureaus, the information on each credit report may differ.

Your credit report contains highly sensitive information, including your social security number, your past addresses, and even the names and addresses of your past employers. Legally, the credit bureaus are only allowed to give this information to certain requestors:

1) A creditor or banker who is considering granting, or has granted you, credit;

2) An employer who is considering you for employment, or a current employer;

Due to recent changes in law, you are now entitled to one free credit report annually from each of the major credit bureaus. In 2005, the federal Fair Credit Reporting Act (FCRA) mandated that consumers were entitled to one complimentary credit report a year from the three credit bureaus. This is a copy of your entire report with all of the information reported to the credit bureaus, and it is the information that your credit score is based on.

There has been a lot of press regarding the recent changes which allow you to pull your credit report once a year, but the question remains: how often should you pull your credit report? Is once a year enough? With identity theft on the rise, and the credit, banking and housing markets in turmoil, many people wonder if it would be a good idea to check their credit more often than once a year.

When people pull their own credit reports, for example when they receive their free annual credit report from the three major agencies, they sometimes worry that the inquiry will “ding” their credit score. This is not the case. Any time you look at your own credit report, the credit bureaus call that a “self-disclosure” or a “self-inquiry” and it does not help or hurt your score. Neither do inquiries from your existing creditors, potential employers, or businesses who are considering soliciting your business (also known as “promotional” inquiries). Your existing creditors will most likely pull your score a couple of times a year, as part of an “account review.” None of these inquiries will hurt you.

A self inquiry is considered a “soft inquiry” and does not affect your credit score. This is to differentiate it from a “hard inquiry” which is an inquiry that comes from a lender who is inquiring for the specific purpose of extending you credit. Numerous hard inquiries can have a negative impact on your score, but soft inquiries have no impact whatsoever.

Up until recently, it was very difficult to see your own credit report. Consumers were not entitled to a free copy of their credit report unless they had recently been turned down for credit. If you were turned down, you had to write to each one of the three credit bureaus – Experian, Equifax, and Transunion – with a copy of your letter of denial, and request a copy of your credit report in writing from each agency. If you were not turned down for credit, and you wanted to see your own credit report, you would have to pay for it. Consequently, most people didn’t request copies of their credit report because they didn’t want to go through the huge hassle of requesting one.

Then in 2005, things changed when the federal Fair Credit Reporting Act (FCRA) mandated that consumers were entitled to one free credit report a year from the three major credit bureaus. At that point, the three agencies teamed up to build a website which allows you to get your free credit report from all three agencies in one place: www.annualcreditreport.com. There is also an 800 number you can use if you prefer to request your free credit report by phone: 877-322-8228.

Many people think that when they get their free credit report, which they are entitled to under law due to the federal Fair Credit Reporting Act (FCRA), they will receive their credit score as well. However, this is not the case. Your credit score is different from your credit report, and it is not included in your free credit report.

What is the difference between your credit report and your credit score? Your credit score, or FICO score, is a three-digit number that represents a statistical analysis of your creditworthiness. Your credit score is based on the information in your credit report, which is usually sourced from the three major credit bureaus. Using this score, lenders will determine the likelihood of your default on a loan, and whether you will make timely payments if they lend you money. The purpose of the three-digit score is to make that assessment easy to make, and understandable in comparison to the standing of other borrowers.