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November 24, 2004
What Is a Credit Report?
A credit report is a report from a credit bureau
containing detailed information bearing on credit-worthiness, including the
individual's credit history.
A typical credit report includes the following:
Personal information.
This is to identify the individual, hopefully distinguishing him or her from
every other individual on the planet. It includes social security number,
current and past addresses, and current employment.
Information from public records (states and
counties). This includes liens,
garnishments, foreclosures, bankruptcies, law-suits and judgments.
Information from collection agencies.
This consists of past due debts that have been
given to collection agencies to collect.
Information from creditors.
This includes the identity of the creditor, the date the relationship began, the
current status of each account including the amount outstanding, the maximum
line if any, current status of the account, and past delinquencies.
Information about inquiries.
This identifies companies that have requested the individual�s file within the
last two years, distinguishing those authorized by the consumer and those not so
authorized. Only the former affect credit scores.
There are three major repositories of credit
information: Equifax, Experian and Trans Union. The information provided by the
three is not exactly the same because not all credit grantors report information
to all three.
At one time, underwriters with responsibility
for determining whether or not a mortgage applicant was "credit worthy" spent
much of their time studying and interpreting credit reports. Increasingly,
however, this judgment is being based on credit scores, which are derived
mechanically from information in the credit reports. Credit scores are discussed
later.
Errors in Credit Reports
The credit reporting system is imperfect. Credit
grantors, which are the source of much of the information that goes to the three
credit bureaus, make mistakes. Some are due to sloppiness, some to confusion
over names, and some are intentional. Some lenders deliberately withhold
information on timely payments and maximum credit lines to prevent a customer�s
credit score from rising, because it might result in losing the customer.
The credit bureaus also make mistakes. They have
no financial interest in keeping anyone�s credit score low, but they do have a
financial interest in managing their enormous databases at the lowest possible
cost. The more common is your name, the higher is the probability that your file
contains information pertaining to someone else with the same name � and that
information about you has been inserted into someone else�s file.
Errors from credit grantors and credit bureaus
are of both omission and commission. An error of omission is a piece of
information which should be in your file but isn�t. An error of commission is
the placing of information in your file that doesn�t belong there. Whatever the
source, errors can adversely affect your credit report. The last section is a
guide on how to remove errors.
What Is a Credit
Score?
A credit score is a measure of your credit
worthiness. The most common credit score is called the FICO score because it was
developed by the Fair Isaac Company. The higher the FICO score, the greater the
likelihood that the debts of the borrower will be repaid on time.
FICO scores range from 350 to 850. According to
Fair Isaac, the median score over the entire population is about 715, with 20%
above 780 and 20% below 620. The minimum score required to qualify for the
lowest mortgage rate is about 740, but it varies from lender to lender, and
often depends on other characteristics of the transaction.
Credit scores have speeded up the process of
making loan decisions, and have largely eliminated personal bias and
subjectivity in the decision process. The major downside is the possibility of
data error. FICO scores are based entirely on information taken from credit
reports. If the credit report is contaminated by erroneous or incomplete
information, the FICO score will also be contaminated.
Will the Passage of Time Improve Your Credit
Score?
The Federal Fair Credit Reporting Act puts
father time on your side by setting limits on how long negative information can
appear in consumer credit records. Once a piece of information has been on a
consumer�s record for the prescribed period, it is supposed to drop off. Once
off, it will no longer affect your credit score.
The prescribed periods are as follows: inquiries
about you from credit grantors, 2 years; late payments, mortgage foreclosure,
collection accounts and chapter 13 bankruptcy, 7 years; chapter 7 bankruptcy, 10
years; unpaid tax liens, forever.
Even before negative information drops off a
credit report, credit scoring will give it lower weight as it ages. However,
this doesn�t do borrowers any good unless they generate new positive credit
information. Old bad stuff plus recent good stuff generates a rising credit
score. Old bad stuff followed by no credit activity results in a continued low
score.
Will Paying Off Delinquent Accounts Improve Your
Credit Score?
No. Delinquencies reduce your credit score
because they are viewed as evidence of a weak commitment toward meeting your
obligations. This evidence of your attitude toward debt is not wiped away when
you repay the delinquent loans. They stay on your record for 7 years. However,
their weight in your credit score gradually declines with the passage of time,
provided your recent payment record is better.
Do Credit Inquiries Hurt Your Credit Score?
Credit inquiries reduce credit scores because
credit scorers have found that multiple inquiries are associated with high risk
of default. Distressed borrowers often contact many lenders hoping to find one
who will approve them.
But multiple inquiries can also result from
applicants shopping for the best deal. Top avoid catching shoppers in their net,
credit scorers ignore auto and mortgage inquiries that occur within 30 days of a
score date. To avoid biasing the credit score from earlier shopping episodes,
the scorers treat all auto and mortgage inquiries that occur within a 14-day
period as a single inquiry.
The upshot is that credit inquiries will not
significantly impact your credit rating if you do all your shopping in a short
period. Since the market can change from day to day, this is the only effective
way to shop anyway.
Consumers should not be concerned about
inquiries they make, such as ordering a credit report. Self inquiries don't
affect the credit score. Neither do inquiries from your existing creditors,
potential employers, or businesses considering whether or not to solicit you.
The only inquiries that affect credit score are those by new credit grantors who
you have explicitly authorized to check your credit.
How Much Debt Is Too Much?
The two major components of a credit score,
which on average account for 2/3 of the total score, are payment history and
amounts owed. Where the first is a record of how well you have met your
obligations over the years, the second is a snapshot of your indebtedness right
now. If your credit history is short, your current indebtedness can be the most
important factor determining your credit score.
The approach that FICO credit scorers use to
determine whether you are living beyond your means is to compare the outstanding
debt on each of your accounts with the maximum amount of debt that the credit
grantor has set for you on that account. This generates a set of "utilization
rates" for each of your accounts.
For example, if you have two credit cards with
maximum balances of $4,000 and $5,000, and if the actual balances are $3,000 on
both as of the most recent date of record, the utilization rates are 75% and
60%.
Other things the same, the higher the
utilization rates, the lower the FICO score.
[Note: Don't run out tomorrow to open some more
lines, so your balances can be spread over a larger number of accounts. The FICO
genie has a strong distaste for multiple new accounts in a short period of time,
which can be an indicator of financial distress.]
Consumers should be aware of potential problems
in connection with the utilization rates that affect their credit score. The
data on debt balances as reported by credit grantors isn�t always correct.
Furthermore, for various reasons, credit grantors do not report maximums on all
revolving accounts. Where no maximum is reported, the largest balance ever to be
reported on the account is used in its stead. Since the highest balance is below
the maximum, often substantially below it, this necessarily results in higher
utilization rates for such accounts.
Before going into the market, it is a good idea
for consumers to check their balances and their credit limits. If an account has
no reported limit, you can either ask the credit grantor to report the limit, or
terminate the relationship. In the unlikely event that the credit grantor won�t
report the limit but you want to maintain the relationship anyway, you can shift
all your balances into this account temporarily so that the highest balance
comes closer to the unreported maximum.
What Is a Delinquent Payment?
A delinquent payment is one that is 30 days or
more past due. This is not the same as a late payment, which is one received
beyond the grace period granted by the lender. If a mortgage payment due on the
first of the month is received on the 20th, for example, it is late
and will incur a late charge, but it is not delinquent and will not appear as
such on the credit report.
Don�t Try to Skip a Mortgage Payment
A single skipped mortgage payment can mushroom
into a cascade of delinquencies if you don�t cure it immediately.
Under the accounting rules used for amortized
mortgages, lenders always credit a payment against the earliest unpaid
obligation. If you skip your payment in April, you will record one delinquency.
If you make your payment in May, it will be applied to April, making you
delinquent for May as well. When you make your payment in June, it is applied to
May, making you delinquent for June. The delinquencies accumulate until the
skipped payment is made good.
Removing Errors in Credit Reports
It is a good idea for consumers to check their
credit well before they go into the market. This will give them time to get any
errors fixed. Give yourself a minimum of three months.
If you find an error, use the form below to
contact the credit reporting agency that reported it. If you follow the
instructions exactly, the agencies are obliged by law to act on your
complaint.
[Note: The dispute form and instructions are
courtesy of Catherine Coy, a mortgage broker who runs a Credit Mastery Workshop
in California.
catherinecoy@charter.net.]
Consumer Dispute And Statement
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Experian |
Trans Union Corp. |
Equifax |
|
Attn: NCAC |
Attn: Disputes |
Attn: Disputes |
|
P.O. Box 2002 |
P. O. Box 1000 |
P. O. Box 740241 |
|
Allen, Texas 75013 |
Chester, PA 19022 |
Atlanta, GA 30374 |
(Indicate the agency to which your complaint is
directed)
I dispute the accuracy of my credit file as
revealed to me on [Give Date].
In accordance with Section 611 of the Fair Credit Reporting Act, I hereby
request that you investigate the current status of the information I have
disputed below in Paragraph 1.
If your investigation does not resolve the
dispute, I hereby file the statement below (Paragraph 2) which shall be included
in any subsequent consumer report containing the information in question.
Credit
Grantor:______________________________________________________
Account
No.:_______________________________________________________
The disputed portion reads:
______________________________________
_____________________________________________________________
_____________________________________________________________
I maintain that:
________________________________________________
_____________________________________________________________
____________________________________________________________
Your Name
_________________________________
Your Street Address
__________________________________________
Your City/State/Zip
_________________________________
Your Social Security Number
_______________________________________
Your Signature and Date
Instructions for Use of Dispute Form
Print a blank version of the form as your
master form.
Fill in your name, address, and Social Security
number on the master form.
Make copies of the master
form as needed. You will need as many copies
of your master form as the number of derogatory items you
are disputing.
Use one copy of the master
form for each derogatory item showing at
each bureau. Some accounts are reported to all three bureaus and some to
only one bureau. Do not dispute a derogatory item at any bureau to which
it is not being reported!
Fill in the form as appropriate:
For accounts with zero balances, dispute as
"not my account; please delete."
For accounts with balances, dispute as
"paid as agreed; never late."
Don�t use any other language because it won�t be
accepted or acted upon.
Sign each form in blue ink.
Mail the form to those bureaus�and only those
bureaus�that are reporting
the derogatory information.
Include a copy of your drivers license and
Social Security card for identification.
Use U.S. Post Office "certified mail; return
receipt requested."
Copyright Jack Guttentag 2004
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