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Page name: Understanding Credit reports [Logged in view] [RSS]
2007-07-01 01:10:28
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Understanding Credit reports


Welcome to Understanding Credit reports!


Teacher: [threelade]


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Students:


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Brief Outline:


1. Credit Report
2. The Credit Score
3. The Quick Fix

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The Credit Report


A credit report is simply a report that details your credit history.
It contains a pool of information gathered from anyone and everyone that has ever lent you money and then reported your payment history. This can be retailers, credit card issuers, banks, finance companies, credit unions, doctors, hospitals, etc.

Many credit lenders report automatically to one or more credit reporting agencies every 30 days on payment history. This allows credit reporting agencies to compile a profile of your personal bill-paying history. The number and type of accounts you have, late payments, collection actions, outstanding debt, and the age of your accounts are put into your personal credit report. Public records are also reported to credit reporting agencies. Public records include any filings of personal bankruptcy or court judgments against you. All of these items remain on your credit report for seven years, except bankruptcies, which remain on your credit report for 10 years.

A credit report also contains identifying information. This includes your name, phone number, address, Social Security number and date of birth. It may also include a list of your current and previous employers and previous addresses. This information is gathered on your credit report to identify you amongst the millions of reports on file.

You also have a record of what are called hard inquiries on your report. A hard inquiry is a record of an application for credit. If too many of these are on your report it reflects badly on your credit score. A prospective lender or other creditor will likely be concerned because it suggests a carefree attitude in applying for credit or an effort to borrow excessively.

There are three main credit bureaus, Experian, Equifax and TransUnion and you have the right to request a credit report from each or even all of them. The cost is usually about 10.00 per report. Listed at the bottom of this lesson are the addresses and phone numbers of all three.

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The Credit Score


Did you ever wonder how a creditor decides whether to grant you credit? For years, creditors have been using credit scoring systems to determine if you'd be a good risk for credit cards, auto loans, secured and unsecured loans and your ability to repay home mortgage loans. Here's how credit scoring works in helping to decide who gets credit and who doesn’t -- and why.

Using a statistical program, creditors compare this information to the credit performance of consumers with similar profiles. A credit scoring system awards points for each factor that helps predict who is most likely to repay a debt. A total number of points -- a credit score -- helps predict how creditworthy you are, that is, how likely it is that you will repay a loan and make the payments when due.

The usual calculation for credit scores is weighted as follows :

Payment history – 35%
Paying your current bills on time is the single most important factor in obtaining a high credit score. This category includes credit cards like Visa and MasterCard, retail accounts, installment loans such as those for a car or education, loans from finance companies, and home mortgages. Also included in this category are matters of public record such as bankruptcies, liens, wage garnishments, and collection accounts. The key to a higher score: Pay your bills on time!

Outstanding balances – 30%
Revolving accounts with an outstanding balance of now more that 49 percent of the credit limit result in the best scoring. Borrowers who have multiple cards but mainly use one card that is always close to the high credit limit are actually hurting their credit score. For example, the credit score will be higher if the borrower has four cards that each has les than 49 percent of the available credit as the outstanding balance, rather than maintaining one account with a balance that is constantly close to the high credit limit.
The best scoring requires a minimum of three to five revolving accounts. Active revolving accounts that have been used in the last six months provide the best scoring.

Credit history (length the account has been opened) – 15%
These variables examine the age of accounts in the credit file.
They consider questions such as “How many years of credit history does this consumer have?” and “What is the mix of older and more newly acquired accounts?” New accounts lower the score for 24 months so if you are trying to obtain a mortgage or new auto loan don’t go out and open accounts just before applying for the loan.

Type of credit –10%
Installment loans made to finance companies are a big hit against the credit score, and any late payments on these types of loans represent an additional adverse effect on the score. While many of these accounts are used by borrowers who take advantage of “90 Days Same As Cash” type promotions, many finance companies charge higher interest rates and can indicate that the borrower’s credit could not qualify for more favorable rates available through a bank or credit union.

Inquiries – 10%
Inquiries from the same type of creditor within a 14-day period only count as one inquiry in calculating the score. The credit scoring model “stops” counting inquiries in the calculations when inquiries reach seven to ten in a 12-month period.
Credit scoring is very favorable to balanced credit use. Extremes represent the biggest hits: lack of credit versus excessive credit.

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The Quick Fix


Sorry but unless there inaccuracies on your credit report that can be removed the only thing that will repair your credit is time so it is very important to take care of your credit. Don’t overextend yourself and pay your bills on time.

These are the three main credit bureaus:

Equifax
PO Box 105873
Atlanta, GA 30348
800-685-1111

Experian
PO Box 2002
Allen, TX 75013
Consumer Credit Questions
888-EXPERIAN (888-397-3742)

TransUnion
PO Box 2000
Chester, PA 19022
(800) 888-4213

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