Understanding Your Credit History “Step by Step”

What is Your Personal Credit Report?

It seems a shame that no company keeps an official record of all the good deeds you’ve accomplished throughout your life. But, there is an official record of your money habits. It’s called your credit report.

Your credit report describes just about all the major decisions that you have made with your money during the past several years. Usually, seven to ten years worth of data may be found on your report.

Your credit report contains information about where you work and live and how you pay your bills. It includes your current and previous addresses, social security number, date of birth, and your employment history. It may also show whether you’ve been sued or arrested or have filed for bankruptcy. Your credit report even contains information about how often in the past you have requested to check your…uhm, credit report. But, mostly, your credit report details the amount of credit that has been extended to you, how much of this credit you have chosen to use, and the manner in which you have paid back any monies loaned to you.

Who has collected all this information about me? And, who gave them permission to tell my business?

Your creditors routinely provide information about you to privately held companies that compile this type of information called credit bureaus. The credit bureaus then sell your credit report to businesses that use this information to evaluate your applications for credit, insurance, employment, and for other purposes allowed by the Fair Credit Reporting Act (FCRA). (see link, Education Center page)

As for who gave your creditors permission to record information about you and to share it with the credit bureaus…well, you did! Each time you signed an application for credit—whether it was a credit card, a loan, your mortgage, or even your overdraft protection at the bank–you gave your permission for your creditors and the credit bureaus to make available information about the loan and about its repayment …its all in the fine print. Now, because, your credit report may be used by various agencies to evaluate your credit worthiness for many different purposes, it’s important that the information in your report be complete and accurate.

Where can I get a copy of my credit report?

The names of the major credit bureaus are listed below. Because, each of these companies may hold somewhat different information about you, it is important that you obtain copies of your report from all three of the major bureaus. You may contact each of the credit bureaus directly to obtain a copy of your most recent credit report. If, however, you choose to contract with a professional service that charges a fee to obtain your credit report for you, make sure that the professional service you employ obtains reports for you from the main three major credit bureaus.

Equifax

800-685-1111

www.equifax.com

Experian

888-397-3742

www.experian.com

Trans Union Corporation

800-888-4213

www.tuc.com

 A credit report contains your credit history over the last seven to ten years. It includes your current and previous addresses, Social Security number, date of birth, employment history, and any inquiries by lenders. The crux of the report is specific information about each account, such as the date opened, credit limit or loan amount, balance, and payment pattern. The report will also contain records of bankruptcy, tax liens and monetary judgments within the allowable time frame.

What is Credit scoring?

Credit Scoring is a tool used by lenders to determine a borrower’s overall creditworthiness. FICO scores take into account information about your checking & savings activity, outstanding debt, and your payment history. The better your record, the higher your score, which can range from 350 to 850.

What is a FICO score?

A FICO score is a snapshot of your credit risk picture at a particular point in time. The higher your score, the lower the risk to lenders. It’s called a FICO score simply because it was named after the original accounting company that conceived it—The Fair Isaac Corporation. FICO scores are calculated by each of the three major credit reporting agencies. And, while the term “FICO score” is used throughout the credit industry, each of the three credit bureaus uses their own particular mathematical formula to tabulate your score. That’s why the FICO score you receive from each of the credit bureaus may be slightly different and that’s another reason why it is important to obtain your report from each of the major bureaus.

What factors significantly impact a credit score?

Paying as many bills on time as possible is the single most important contributor to a good credit score. Another factor looked at is the balance owed in comparison to your credit limit- the lower your balance the better. In addition, you want to avoid overextending yourself and applying for credit needlessly. Promotional offers & applications for credit show up as inquiries on your credit report, which could indicate to potential lenders that you may be unable to manage the credit you currently have open. Lastly, your length of credit history is heavily weighted, which is the average age of all accounts.

What is a charge-off?

Charge-off is the terminology used when the original creditor sells the debt to a collection agency, possibly even a lawyer’s office acting as an agent for the purposes of debt collection, or when the original creditor writes the debt off as a loss. This is considered a negative item on your credit report which could remain listed for up to seven years.

True or False: A poor credit score will haunt me forever.

False! A score is a “snapshot” of your risk at a particular point in time. Federal law specifies how long negative information may remain on your credit report. Most negative information must be erased after seven years. If you do have negative information on your credit report, such as late payments, a public record item (i.e. bankruptcy), or too many inquiries, your best strategy is to keep as many bills current as possible and wait. Scores change gradually as you change the way you handle credit. For example, past credit problems impact your score less as time passes. We firmly believe that time is your best ally in improving credit!

What if there are circumstances regarding a negative item on a credit report?

Consumers have the ability to send a statement of explanation (100 word count maximum) with supporting documents (i.e. cancelled checks, settlement letters, etc.) to the credit-reporting agency. Upon the credit bureaus approval, they will place this statement next to the referenced account. ( Refer to the sample Statement of Explanation found on our Education Center page).

How do I correct a mistake on my credit report?

If it truly is an error, there are several steps to take. First, contact the credit bureau(s) you obtained your reports from to dispute the incorrect items- some allow you to dispute over the phone, online, or by mail. You may need to copy your credit report, highlight the error(s) and submit a request to the credit reporting company for an investigation of the disputed item. By law, the Bureau must investigate your claim within 30 days and respond to you. If an error is confirmed, they will issue you a revised credit report (if requested) and notify all nationwide credit reporting agencies for the purpose of correcting the information in your file. Refer to the sample Letter of Dispute found on our Education Center page).

How can I work on rebuilding my credit and improving my score?

Hate to sound like a broken record, but… paying your bills on time is one of the most significant factors in rebuilding credit. Be diligent about not bouncing checks or taping into overdraft – besides accruing high fees, your payment may be late and affect your score. High amounts of outstanding debt can dramatically affect a score as well. Keep balances low on credit cards and other lines of “revolving credit”. Another effective way to improve your score is to pay off debt rather than moving it around. (i.e. balance transfers). It’s also important not to open new credit cards that you don’t need for the purpose of increasing your available credit – this approach could backfire and lower your score. However, opening new accounts responsibly and paying them off in full each moth will raise your score in the long-term.

My credit score determines whether or not I get credit, right?

In fact, lenders use a number of facts to make credit decisions, including your credit score. Based on their perception of this information, as well as their specific underwriting policies, lenders may extend credit to you although your score is low. If this is the case, you must evaulate your options carefully. You may pay a much higher interest rate due to the perceived credit risk. Which brings us to a very interesting point…

What is the urgency to restoring credit?

We urge you to carefully evaluate the want of achieving unblemished credit. Often times, getting into financial difficulties takes many months or years and likely, it will take approximately that same timeframe to pay down debt and work on rebuilding credit. Let’s think of it this way: Credit is money you borrow and plan to repay. In other words, it’s debt. There are certainly both advantages and disadvantages to using credit. When used correctly, credit allows you to purchase large items and make sound investments that you might not have enough cash to pay for- such as a car, house, or college education. However, credit also costs money.

Anytime a bank or business lends you money, there is a charge for borrowing that money, and it is usually in the form of interest and fees. When you make a purchase using credit, you commit to using future income to repay the balance. It means that you will have less money in the future to spend on other things. Lastly, the number one disadvantage to using credit is that it can often tempt you to spend more than you can actually afford to pay (or repay).

Being granted credit or having a great credit score can create a feeling of acceptance & worthiness to those it is given to. However, your worthiness as a person has nothing to do with your credit report or the number of credit cards you can amass. Consider replacing the word “credit” with the word “debt” and you may think twice before reaching for the plastic!

Check your credit report once per year. We recommend checking your credit report often to make sure that all the information is current and accurate (i.e. paid-off loans, closed accounts, etc.).

Good luck and don’t forget to speak with your coach about your experience!