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Understanding your Credit Report and your Credit Score

When you apply for a credit card, car loan, personal loan or mortgage, the lender will want to know your past history of borrowing in order to understand the risk they might be taking by lending you money. The status of your credit score will depend on how good you’ve been in the past at repaying your debts. A bad credit history can affect the credit that’s made available to you or even cause you to be denied credit completely. On the other hand, a healthy credit report and a high credit score can mean better financial options for you. To find out where you stand, a lender will go to a credit reporting agency to get your credit report.

What are Credit Reporting Agencies?

Credit reporting agencies collect an individual’s financial information, compile it into a credit report and, for a fee, make it available to the individual and to other authorized parties, including financial institutions. Generally when you apply for a loan you give the lender permission to get a copy of your credit report. Companies that lend money rely on credit reporting agencies and the credit reports they generate to help them assess a customer’s ability to repay what they borrow.

Although there are many local and regional credit bureaus throughout the United States, most credit bureaus are either owned or under contract to the nation's three major credit reporting agencies: Equifax, Experian (formerly TRW) and TransUnion.

What is a Credit Report?

A credit report is a detailed history of a person’s borrowing habits and consists of the following information:

What is a Credit Score and How is it Calculated?

When a lender gets your credit report, they can also generally get your credit score. A credit score is a mathematically calculated number based on the information in a credit report. By comparing this information to hundreds of thousands of other credit reports, credit reporting agencies come up with a number that can be used to identify your level of future credit risk.

Credit scores are often called “FICO scores” because most scores are produced from software developed by Fair Isaac Corporation also known as FICO. FICO scores range from 300 to 850 – the higher the score, the lower the risk. 

In order for a score to be calculated on your credit report, the report must contain at least one account which has been open for at least six months. The report must also contain at least one account that has been updated in the past six months. This ensures that there is enough recent information in your report on which to base a score.

Will Scores be Different at Each Credit Reporting Agency?

Yes, but they should be within a few points of each other. If they do differ by more than a few points it should be a red flag that something is wrong and should be further investigated.

There are three different FICO scores developed at each of the three different credit reporting agencies. FICO uses the same method to come up with each score, but the score at each of the three agencies may not be exactly the same because of the different ways lenders report information to the agencies. The FICO score from Equifax is called BEACON, the score from Experian is called the Experian Fair Isaac Risk Model and the score at TransUnion is known as EMPIRICA.

Is FICO the only credit score that lenders use?

No.  Many lenders use scoring systems that include the FICO score but may also consider other information in your credit application including the customer’s history with the institution. However, when purchasing a credit score for yourself, make sure to get the FICO score, as this is the score most lenders will look at in making credit decisions.

It is important to remember that no one piece of information or factor alone will determine your score and while lenders use scores to help them make lending decisions, every lender will have its own set of guidelines for a given credit product.

What does a FICO score take into consideration?

Your FICO score only looks at information in your credit report and considers both the positive and the negative information on the report including:

Length of Credit History – (accounts for about 15%)

How Does the FICO Score Count Inquiries?

The FICO score counts inquiries or requests a lender makes for your credit report or score when you apply for credit. Too many inquiries can have a negative impact. Looking for a mortgage or an auto loan (rate shopping) may cause multiple lenders to request your credit report within a short period of time. The score counts multiple inquiries in any 14-day period as just one inquiry. The score also ignores all inquiries made in the 30 days prior to scoring. If you find a loan within 30 days, the inquiries won’t affect your score while you’re rate shopping. One credit inquiry will usually take less than five points off a score. Inquiries can have a greater impact if you have very few accounts or a short credit history.

What FICO Scores Do Not Look At:

Tips on Improving Your Credit Score:

What if I am Denied Credit?

If you have been turned down for credit, the Equal Credit Opportunity Act (ECOA) gives you the right to find out why within 30 days. You are also entitled to a free copy of your credit bureau report within 60 days, which you can request from the credit reporting agencies.

 When a lender receives your credit score, up to four “score reasons” are included. These will explain the reason for your score. If the lender rejects your request for credit, and your FICO score was part of the reason, these reasons can help the lender tell you why you were rejected and can help you determine how to improve your credit.

You Are Entitled To A Free Copy Of Your Credit Report…

(You are entitled to get your credit score free of charge from your lender when applying for a mortgage.)

Correcting Errors on Your Credit Report

The Fair Credit Reporting Act requires that incomplete or incorrect information on your credit report must be corrected for free by the credit reporting agency. If you find an error and ask that it be corrected, the credit reporting agency has 30-45 days to investigate. Only inaccurate information may be removed from your credit report; negative information that is accurate will stay on your credit report as long as governing laws allow.

To submit a dispute:

The credit reporting agency will ask the party that generated the information for their records.  After the investigation you can expect the following from the credit reporting agency:

If you feel that the credit reporting agency has not resolved your dispute you can add a statement to your report that explains your side of the story. The statement must be less than 100 words and will remain on your report for seven years. It will be sent to anyone who requests a copy of your report.

Please Note that since 2006, the New York State Security Freeze Law has allowed New York State residents to place a Security Freeze on their credit reports. Please visit the New York State Consumer Protection Board.

Request your free annual credit report from all three major agencies online at annualcreditreport.com. You can also call (877) 322-8228 to request your credit report by phone. You will go through a simple verification process over the phone and your reports will be mailed to you.

 

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