Credit & How it Affects
Your Interest Rate
Most likely you're familiar with the concept of “credit”: The reputation for paying your bills on time that makes it possible for you to obtain money or goods with the understanding that you'll pay for them later.
In fact, you've probably put your credit to work for you if you've obtained an auto or student loan, used your credit card to pay for something, or rented an apartment or house.
But even if you use your credit every day, you may have questions about the credit industry and how it affects you. It's good to know how credit decisions are made.
What Is A Credit Bureau?
A credit bureau or credit reporting agency gathers, maintains, and sells information about consumers' credit histories.
It collects information about consumers' payment habits from banks, savings and loans, credit unions, finance companies, and retailers. The information is sold as credit reports to creditors or lenders.
When you apply for a credit card or loan, the lender orders your credit report from at least one credit bureau and analyzes the information to decide whether or not to grant you credit. The credit bureau charges a fee for every credit report sold.
Although credit reporting agencies provide your credit report to lenders, they do not make the actual lending decisions. The lender evaluates your credit report and any other factors they consider important when deciding whether or not to offer you credit.
The Three Consumer Credit Bureaus
There are three major credit bureaus that provide nationwide coverage of consumer credit information in the United States:
Equifax
www.equifax.comInformation Service Center
P.O. Box 740241
Atlanta, GA 30374-0241
1-800-685-1111
Experian (TRW)
www.experian.comNational Consumer Assistance Center
P.O. Box 949
Allen, TX 75013-0949
1-888-EXPERIAN (1-888-397-3742)
Trans Union Corporation
www.transunion.comCustomer Disclosure Center
P.O. Box 390
Springfield, PA 19064-0390
1-800-888-4213
Although most national lending institutions report consumer credit information to all three, smaller banks and other credit grantors may report to only one or even none. That's why your credit report may vary from one credit bureau to another.
What Exactly Is A Credit Report?
A consumer credit report contains an individual's credit payment history. Lenders are permitted by law to review your credit report to determine whether to grant you credit.
What Information Does A Credit Report Contain?
A consumer credit report contains four types of information: identifying information, credit information, public record information, and inquiries.
Identifying information is things like your name, address, Social Security number, birth date, employers, etc.
Credit information includes credit accounts or loans you have with banks, retailers, credit card companies, and other lenders.
Public record information includes any information that's contained in state and county court records, like bankruptcies, tax liens, monetary judgments.
Inquiries show when you've applied for new credit. Potential lenders view multiple recent inquiries on your credit report as a sign that you are overextending yourself. Inquiries stay on your credit report for up to two years.
Most information remains on your credit report for seven years. Bankruptcies will stay on for ten. If there is inaccurate information in your credit report, you have the right to dispute it and have it removed.
Does A Credit Report Contain Other, Unrelated Personal Information?
No. Your consumer credit report does not contain information about your race, religious preference, medical history, personal lifestyle, personal background, political preference or criminal record.
What is a Credit Risk Score?
A credit risk score is an assessment of an individual's credit worthiness based on a statistical analysis of the information contained in his or her credit report.
The most well known type of credit risk score is the Fair, Isaac or FICO score. Sophisticated mathematical processes calculate the summary by assigning numerical values to various pieces of information in the credit report. Credit bureaus provide risk scores to credit grantors who use them to objectively evaluate an applicant's credit-worthiness.
The score itself is relative and will be viewed differently by creditors depending on numerous factors, including the creditor's risk level, marketing goals, and business practices. Your risk score will change over time as your credit history develops.
What Is A Mortgage Report?
A mortgage report is a special credit report that lenders use prior to deciding whether or not to give you a home loan. Each report is compiled from credit reports from two or three credit bureaus. The mortgage credit reporting company purchases credit reports from the credit bureaus, combines them, and manually verifies specific information such as employment, credit account balances and public record information.
An employment report is a modified credit report that helps potential and current employers make hiring and promoting decisions. The employment report contains much of the same information about your loans and credit cards that your credit report has listed. However, your marital status, year of birth, and account numbers are omitted from the employment report.
Who May Check My Credit Report?
Federal Law carefully regulates how credit reports can be used and by whom. Individuals have the right to obtain their own reports, and businesses must meet the following requirements before they can access credit information:
- A background Proof of a permissible purpose under federal law
- Check and on-site inspection of the business
- A current business license
- A signed contract requiring the business to use the data properly
Getting a Copy
Under the Fair Credit Reporting Act (FCRA) you're entitled to a free credit report within 60 days of being denied credit, employment, insurance, or rental housing based on information in the report.
You are also entitled to a free report once a year if you certify that you are unemployed and seeking employment; you are receiving public welfare assistance; or you believe your credit file contains inaccuracies resulting from fraud.
Otherwise, you will need to pay a fee for each report you request. Equifax, Experian (TRW), and Trans Union are the top three credit bureaus. Since not all creditors "report in" to each credit bureau, financial experts suggest you request your credit records from all three if you are concerned about your credit history.
Correcting it
If the information in your report is inaccurate or unfair, you will need to correct it.
First, contact the creditor that filed the complaint, correct the error and ask that any credit bureaus involved be notified in writing. Be sure to document your efforts. If the credit bureau made the mistake, challenge it. By Federal law, it will have to delete the disputed information if it can't be confirmed. Both the credit bureau and the creditor who filed the derogatory information must help you resolve the issue in a timely manner, within 30 days.
Once corrected, the credit bureau will send a revised copy of your report to any credit grantor who requested it over the past six months. However, they may do so only if you ask them to send it.
Protecting it
Although it isn't that common, your credit report will show you if someone is using - or trying to use - your credit information for fraudulent purposes. You may see credit cards or loans you did not apply for, or address change notices you did not submit. Worse, your good credit record may have been damaged.
Notify the credit bureau(s) at once. They can offer advice and help you put together a list of affected creditors to notify. They also add a fraud statement to your report. This action alerts future creditors to verify your identification before granting credit. Although the credit bureau may be helpful, bear in mind that it is your responsibility to notify creditors of fraud.
Currently, companies can ask to review your credit history and send written credit or insurance solicitations based on what they find. You have the right to keep your credit information from being distributed without your permission.
Federal law states that credit bureaus must provide an address and toll-free telephone number that you may use to request your credit report not be distributed without your permission.
Keeping Tabs
With today's database technology, it may not be enough to check your credit report every couple of years. Your information is constantly changing. If in the next year or so you're planning on purchasing a home, refinancing, or buying something that may require credit (like a new car or furniture), you may need to check your reports on a quarterly or semi-annual basis. Don't wait until you're ready to apply for a loan, because if there is a problem, it may take time to be resolved.
Want to Talk to a Mortgage Expert?
Take 30 seconds to provide some information and we'll contact you to help determine the best home loan for you.
