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FDIC Consumer News - Winter 2002/2003
Credit History 101: The ABCs of Credit Reports and Credit Scores
If you're like many consumers, you probably have questions about what goes into your credit report and who uses it. Here is an overview that we hope will address many of your questions and concerns.
What is a credit report?
A credit report is a summary of your financial reliability—for the most part, your history of paying debts and other bills. It is prepared by credit bureaus (also known as credit reporting agencies) primarily for use by lenders, employers and others who, under the federal Fair Credit Reporting Act (FCRA), have a legitimate need for the information, such as when you apply for a loan, insurance policy, apartment or job. The wealth of information gathered by credit bureaus, coupled with the speed of today's computer systems, explains why consumers can quickly get loans and other services, including approvals of certain credit applications in minutes.
What is in my credit report?
In general, your credit report has four components:
Your credit report typically does not contain information about your checking and savings account balances, brokerage accounts, medical history, race, sex, religion, national origin, or your driving record.
How do credit bureaus get their information?
According to David Lafleur, a Policy Analyst at the FDIC, "Lenders voluntarily supply the information to credit bureaus on an ongoing basis; no federal laws require companies to submit the data." Why? Because having access to current and reliable information about you helps lenders make informed decisions and offer you financial products and services very quickly. Lenders, landlords and other users of credit reports also may want to know about events such as lawsuits and bankruptcies, so credit bureaus obtain this information from courthouses and public records.
Can anyone get my credit report?
No. The Fair Credit Reporting Act (FCRA) contains rules about who can get your credit report. Generally, a third party can access your credit report when considering an application you've made, such as for a loan, a job, insurance or an apartment. The law also allows entities to access your report as part of an ongoing business relationship. Suppose you already have an auto loan at the bank and you miss a payment or you move and don't provide a forwarding address. In this situation, the bank has the right to obtain a copy of your latest credit report.
But even if you are paying on a loan or credit card as agreed, the institution where you have the account can obtain your credit report as part of its regular maintenance of the account, and that includes looking for warning signs that you may have problems fulfilling your obligations in the future. "For example, it is not uncommon for credit card issuers to review their cardholders' credit reports on a regular basis and raise their APR (annual percentage rate) or lower their credit limit if there are signs of trouble, even if someone has been diligently paying the card issuer," says FDIC Consumer Affairs Specialist Howard Herman.
An exception to the ongoing relationship would be for employers who would first need to obtain the employee's permission each time before requesting a credit report.
How can I get a copy of my credit report?
First, be aware that there is no one credit report on you. Most likely, each of the three major credit bureaus that operate nationwide—Equifax, Experian and TransUnion (see "The Three Major Credit Bureaus")—has a credit report on you. And because the credit bureaus can have different information and findings, many experts advise you to obtain your report from each of the three major credit bureaus. (There also are many smaller or regional credit bureaus that may have a report on you, but the big three are the most commonly known and used companies.)
"The law works on your behalf by requiring the lender to tell you the reason for the denial, the name of the credit bureau, and the fact that you are entitled to a free copy of the report on you," explains Lafleur. "You can then determine if any credit report information is wrong, and if it is, you can immediately begin the process of correcting it." He adds that, under the FCRA, if an employer intends to deny a job application or terminate employment based on information in your credit report, the employer must provide you a copy of the report before finalizing that decision.
How often should I get my credit report?
Many financial advisors suggest that you review your credit report for inaccuracies or omissions about once a year. It's especially important to review your credit report before making a major purchase, such as a home or a car, so you can correct an error before it slows down your credit approval or prevents you from getting the best possible loan terms.
What kinds of problems could I encounter?
While federal law requires lenders and other companies providing information to credit bureaus to give accurate information, mistakes do happen. So, when you look at your report:
The FCRA gives you the right to dispute inaccuracies or omissions, and it requires credit bureaus to investigate your complaint (generally within 30 days), send you a prompt response and correct any errors. The law also requires the source of inaccurate information (such as a bank) to correct the record at the credit bureaus to which it initially provided the erroneous information.
Staff at the FTC, the government agency responsible for ensuring credit bureaus' compliance with federal laws, suggest the following: Immediately tell the credit bureau, in writing, about information you believe is incomplete or inaccurate. Include copies, NOT originals, of any documents that support your position. Clearly identify each item in your credit report that you dispute, state the facts and request a correction. Send your letter by certified mail and request a return receipt to document that your complaint arrived at the credit bureau. Keep copies of your dispute letter and enclosures. Also contact the company that provided the inaccurate or incomplete information to the credit bureau and request a correction of its records, too. If a credit bureau's investigation does not resolve your concerns, the FCRA allows you to submit a brief statement about the matter, in 100 words or less, that must be attached to your credit report and provided to anyone that accesses your report in the future. This enables you to tell potential lenders or anyone else who sees your credit report your side of the story.
Note: While there are hundreds of other credit bureaus around the country, there is little reason for consumers to review and correct these credit reports, according to the FDIC's Herman. "Those smaller credit bureaus typically get most or all of their information from the big three," he says. "If you obtain copies of your credit reports from Equifax, Experian and TransUnion on a regular basis and you make sure they are accurate, it's likely you'll be addressing problems at other credit bureaus, too."
What if I have a question or complaint involving a credit bureau?
First, try to resolve the matter with the credit bureau directly. If you're not satisfied, contact the FTC. The FTC does not resolve individual disputes, but it does provide useful information that may help consumers resolve their problems. Awareness of consumer complaints also enables the FTC to spot patterns of problems that may trigger an enforcement action.
What is a credit score and why is it important?
A credit score is a number calculated by a credit bureau, a lender or another company intended for use in making a decision on a loan application or other product or service. (For example, many lenders use a system developed by Fair Isaac and Company called the "FICO score.") Think of credit scoring as a point system based on your credit history, designed to help predict how likely you are to repay a loan or make payments on time. Everyone with a credit record also has a credit score. Different lenders and other companies may use different scoring systems, so your score (and the products or services you're offered as a result) may vary significantly from one source to another.
In general, the better your credit score the better your chances are of getting a loan with an attractive interest rate. Alternatively, a poor credit score may mean you can only qualify for a "subprime" loan—one with a higher interest rate and higher fees than those offered to applicants with "prime" credit records. So when it comes to getting a good loan, it's important that your credit report—the basis for your credit score—is accurate, complete, and in the best shape possible.
What are the most important factors in determining my credit score?
Typically, your credit score is most influenced by two factors: how you pay your debts and how much debt you owe. For example, late payments on loans, a past bankruptcy, debt collections or a court judgment ordering you to pay money as a result of a lawsuit will negatively affect your credit score.
Lenders want to be sure that the debt you owe is manageable. One example: Lenders get concerned if you have a significant amount of debt compared to your income—say, if what you owe each month on all loans and credit cards exceeds one-third of your monthly income.
Other factors that can affect your credit score include how long you've used credit, how often you've applied for new credit and whether you've taken on new debt. For more information about factors that can lower your credit score, see the next page.
How can I get my credit scores?
Your scores, along with an explanation of how the score was derived, typically are available online for a small fee. You may want to call or check the Web sites of any of the three major credit bureaus. Remember, your score may vary from one company to another.
How can I learn more about credit reports, credit scores and my rights? Read the other articles in this issue of FDIC Consumer News and check the Web sites of the government agencies listed on "For More Information from the Government."
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