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Understanding your credit report


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A comprehensive guide to understanding your credit report and credit score

Published in: Economy & Finance
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Understanding your credit report

  1. 1. UNDERSTANDING YOUR CREDIT REPORT Taleris Credit Union takes the mystery out of reading and repairing your Credit Report and Credit Score.
  2. 2. Credit Report Basics WHAT IS A CREDIT BUREAU ? Creditors voluntarily report your credit information to Credit Bureaus. Each bureau assembles that information, along with public record information obtained from courthouses, into a file on each consumer called a credit report. There are three major credit bureaus: • Equifax: (800) 685-1111 • Experian: (888) 397-3742 • Trans Union: (800) 916-8800 These national agencies maintain centralized databases containing the credit records of more than 200 million Americans. Credit bureaus generate over a half-billion credit reports a year. • Credit bureaus do not rate credit • Credit bureaus do not approve or reject consumer applications for credit • Credit bureaus only store and report the information • Accounts may or may not be reported on all three bureaus
  3. 3. Credit Report Basics FREE PERSONAL CREDIT REPORT The Fair Credit Reporting Act (FCRA) and the Fair and Accurate Credit Transactions (FACT) Act, provide that every consumer is entitled to one free Personal Credit Report from each of the three national credit reporting agencies annually. This is the ONLY government based FREE report. • Request Online • Request by Phone (877) 322-8228 • Request by Mail Annual Credit Report Request Service P.O. Box 105281 Atlanta, GA 30348- 5281 You can get a free credit report when you’ve been turned down for credit by requesting your report from the credit bureaus within 60 days. The company you applied with is required to send you a letter giving instructions to order your credit report within a few days after the denial decision has been made. If you don't receive a letter, contact the lender. It is also important to note that a credit report is free, but a credit score is not. People often confuse and interchange "report" and "score". You should, without fail, check your credit report at least once per year or more. Regular credit checks help you to spot inaccuracies and signs of identity theft before they cause major financial damage.
  4. 4. Credit Report Basics PRIMARY CATEGORIES OF INFORMATION There are four primary categories of information on all credit reports: 1. Personal information 2. Credit history (Summary and Report) 3. Public records 4. Inquiries • Personal Information includes: Name, current & previous addresses, social security number, telephone number, date of birth and current and previous employers • Credit History shows history of paying bills with creditors such as: retail stores, banks, credit unions, finance companies and mortgage companies. Some reports show a summary of all your accounts as well. • Public Records includes judgments, foreclosures, tax liens and bankruptcies • Inquiries shows records of any company who has requested your report in the past 24 months
  5. 5. Credit Report Basics WHAT CREDIT HISTORY DETAILS DOES THE CREDIT REPORT INCLUDE? For each account listed, it provides the: • Creditor’s name • Type of account (loan, credit card, mortgage, etc.) • Date the account was opened • Amount of the highest credit or original loan amount • Required payment amount and unpaid balance • Current status of the account • Payment history • Any personal remarks or special comments to describe the loan situation WHAT DETAILS DOES THE CREDIT REPORT NOT INCLUDE? • Checking or savings account information • Medical history • Criminal records • Purchases made with cash • Race, gender, religion, or national origin
  6. 6. Credit Report Basics PUBLIC RECORDS What are the types of records included in this section of my report and how long does each one stay on my report? Most information stays on your credit report for 7 years. Personal data (address, name, etc.) and positive records don't have predetermined expiration terms. Negative records on your credit report have set expiration terms: • Bankruptcy: 10 years for Chapter 7 filings, 7 years for Chapter 13 filings and 7 years for each • • • • • record marked as "Included in BK“ Charge-offs: 7 years Closed accounts: 7 years if the account was paid late, no expiration date if the account was always paid on time Collection accounts: 7 years from the last late payment on the original account Judgments: 7 years from the filing date Tax liens: 15 or more years if left unpaid, 7 years from the date the lien is paid
  7. 7. Credit Report Basics CREDIT INQUIRIES Who can request a copy of my credit report? • Potential lenders • Landlords • Insurance companies • Employers and potential employers (with your written consent) • Companies you allow to monitor your credit activity, including for potential signs of identity theft • Those considering your application for a government license or benefit • A state or local child support enforcement agency • Collection agencies • Oh.. and you, of course How often do creditors report to the credit bureau? Credit card companies and lenders report your account information to credit bureaus electronically. There's no fixed schedule for this reporting, but most companies send an update every 30 days.
  8. 8. Credit Report Basics CREDIT INQUIRIES What are the types of inquiries and can they damage my credit? When you apply for a loan, credit card or mortgage, you authorize your lender to ask for a copy of your credit report. This is how inquiries appear on your credit report. The inquiries section contains a list of lenders who accessed your credit report within the last two years. • Voluntary inquiries: (hard hit) requests from potential creditors after you apply for credit. These do affect your credit rating to a small degree for a year or so. In order to minimize any negative impact on your credit, try to avoid too many voluntary inquiries over a short period of time. • Involuntary inquiries: (soft hit) result from creditors who order your report prior to sending you one of those "preapproved" offers for credit, or employment background checks. Does not affect your credit rating. • Personal inquiries: (soft hit) result from your personal request for your credit report. Does not affect your credit rating. Note: There are gray areas here since there are no set guidelines for all circumstances when pulling a credit report. So, when opening a checking or savings account, getting a quote for insurance or getting a new cell phone, always ask what type of report is pulled before hand.
  9. 9. Credit Report Basics CORRECTING INACCURATE OR FRAUDULANT INFORMATION How can I get information off of my report? You can remove inaccurate, fraudulent, or expired information from your credit report by submitting a dispute request to the credit bureau. You'll need to submit a separate letter for each credit bureau. The credit bureaus have 30 days to investigate your dispute. If they can confirm that the information is inaccurate, they'll remove it and send you a letter with an updated report. If they can't confirm the correction, they'll send you a letter of explanation. Accurate information cannot be removed from your credit report before its set expiration date. • Equifax: (800) 685-1111 • Experian: (888) 397-3742 • Trans Union: (800) 916-8800
  10. 10. Reading your Credit Report PERSONAL INFORMATION • Make sure the credit bureau is reporting your correct name, address, and employer • Watch out for incorrect addresses—this may be a sign that an identity thief has redirected your mail to a false address.
  11. 11. Reading your Credit Report CREDIT SUMMARY • See all of your essential credit report information at-a-glance. • Watch out for inaccuracies that could negatively impact your credit standing.
  12. 12. Reading your Credit Report CREDIT REPORT • Make sure the information is accurate • Watch out for accounts that are not familiar—these could be fraud accounts. Condition • Open • Closed Type • Installment loan • Mortgage loan • Revolving account Responsibilit y • Individual • Joint
  13. 13. Reading your Credit Report INQUIRIES • Make sure you've authorized all of the inquiries. • Watch out for names of companies that are not familiar—if you haven't authorized the inquiry, it may be a sign of fraud.
  14. 14. Credit Score Basics WHAT IS A CREDIT SCORE? Your credit score, also known as a FICO (Fair, Isaac and Company) score, is a number that reflects your credit worthiness at a given point in time. FICO scores are used by 90% of lenders. It is the key to your financial life and is used by mortgage lenders, car loan lenders, credit card companies, landlords, cell-phone companies, and even prospective employers to size whether you are a good or bad credit risk. The high (perfect) score is 850. Obviously, the lower you go, the worse your credit is and the higher your risk to lenders. The median FICO score is 720 out of a possible 850. Scores below 600 are considered the highest risk. Higher scores are better and translate to lower interest rates.
  15. 15. Credit Score Basics WHAT MAKES UP A CREDIT SCORE? Payment History - 35% The most important component of your credit score looks at whether you can be trusted to repay money that is lent to you. This component of your score considers the following factors: • Have you paid your bills on time? Paying bills late has a negative effect on your score. • If you've paid late, how late were you - 30 days, 60 days, or 90+ days? The later you are, the worse it is. • Have any of your accounts gone to collections? This is a red flag to potential lenders. • Do you have any charge offs, debt settlements, bankruptcies, foreclosures, suits, wage attachments, liens or judgments against you? These are some of the worst things to have on your credit report from a lender's perspective
  16. 16. Credit Score Basics WHAT MAKES UP A CREDIT SCORE? How much do you owe? – 30% • How much of your total available credit have you used? Less is better, but owing a little bit can be better than owing nothing at all because lenders want to see that if you borrow money, you are responsible and financially stable enough to pay it back. • How much do you owe on specific types of accounts, such as a mortgage, auto loans, credit cards and installment accounts? Credit scoring software likes to see that you have a mix of different types of credit and that you manage them all responsibly. • How much do you owe in total, and how much do you owe compared to the original amount on installment accounts or credit limits on revolving accounts? Again, less is better
  17. 17. Credit Score Basics WHAT MAKES UP A CREDIT SCORE? Length of credit history– 15% • Your credit score also takes into account how long you have been using credit. How many years have you been using credit for? How old is your oldest account, and what is the average age of all your accounts? • A long history is helpful (if it's not marred by late payments and other negative items), but a short history can be ok too as long as you've made your payments on time and don't owe too much.
  18. 18. Credit Score Basics WHAT MAKES UP A CREDIT SCORE? New Credit– 10% • Your FICO score considers how many new accounts you have. It looks at how many new accounts you have applied for recently and when the last time you opened a new account was. The score assumes that if you've opened several new accounts recently, you could be a greater credit risk; people tend to open new accounts when they are experiencing cash flow problems or planning to take on lots of new debt.
  19. 19. Credit Score Basics WHAT MAKES UP A CREDIT SCORE? Types of Credit– 10% • The final thing the FICO formula considers in determining your credit score is whether you have a mix of different types of credit, such as credit cards, store accounts, installment loans and mortgages. It also looks at how many total accounts you have. Since this is a small component of your score, don't worry if you don't have accounts in each of these categories, and don't open new accounts just to increase your mix of credit types
  20. 20. Building Your Credit BUILDING CREDIT HISTORY Building a credit history is important for consumers planning on purchasing big ticket items, such as a house, on credit. Generally, people have to establish a credit history before they purchase those big ticket items. Credit history affects a young adult’s ability to rent an apartment, buy a car, purchase appliances and may affect employment opportunities. Strategies to build a credit history include having: • Store accounts (JCPenney or Sears cards) • Gasoline card • Visa or MC (even with a co-signer or secured balance) • Small loan from your credit union Although the following are all positive financial practices, a credit history is not established if a consumer • Has no history of credit use • Has no credit accounts in own name • Pays cash for all major purchases • Pays phone and utility bills on time
  21. 21. Maintaining Your Credit MAINTAIN A POSITIVE CREDIT HISTORY Although there are many ways for a consumer to build a credit history, it is important once you have established credit, to maintain that credit rating and keep trying to improve it. Strategies for maintaining and improving your credit rating include: • Pay bills consistently and on time. One of the most important steps in building and maintaining a solid credit history is to pay all of your bills on time each month. By paying on time, you're showing the lender or creditor that you've got enough cash flow to cover your expenses. • Keep your accounts to a minimum. Yes, this is confusing. You are penalized for having too few accounts and for having too many accounts with balances. Find a happy medium. • Regularly read your credit report. One way to building a positive credit history is to make sure you know what information is being reported. Errors and negative information can damage your credit history and your credit score, so you'll want to regularly check your credit report to see what's there. • If you are having trouble making ends meet, contact your creditors right away. Avoiding debt won’t help you. Most creditors are willing to work with you if you contact them first.
  22. 22. Maintaining Your Credit MAINTAIN A POSITIVE CREDIT HISTORY – CONT. Keep your accounts open. This is the most frequently asked question we get. Should I close my paid off accounts? The answer is no. Remember, the lower your debt to credit limit ratio the better off you are. So, if you have a credit card with a $5000 limit and a zero balance, guess what? You are at 0% of your credit limit! Keep your total charges well within your credit limit. If you want to boost your credit history and credit score, you'll want to keep your total monthly charges well within your credit limit. Preferably around 20% of your limit is a good place to be. Why? In calculating your credit score, creditors look to this “debt to credit limit” ratio and see how close you are to maxing out your accounts. The lower the ratio, the better your chances to get a favorable result on your request for credit. You'll take a hit if your balance is above your limit because it signals to creditors that you may be having financial difficulties and thus are a riskier borrower. Don’t be afraid to ask for a credit line increase after you’ve had the account for awhile. That will lower your ratio! Mix it up . Someone with a great credit score would have at least one credit card, one home loan, one auto loan, and maybe one student loan on his or her credit report. Each account open and active. The diversity of credit account types is seen as a sign of stability and credit responsibility. Focus on longevity. Creditors like to see that all of your credit and loan accounts have been open for five or more years. Another reason to keep those zero balance accounts open. It won’t hurt to make a small charge once in a while on these accounts too as long as you pay them off right away.
  23. 23. Repairing Your Credit FIXING BAD CREDIT People don’t start out with bad credit or plan to have their credit rating go south. But, things happen in life to all of us that can cause us financial hardship and, in turn affect our credit. Loss of a job, disability or illness can cause any of us at anytime to have credit problems. If we haven’t prepared for this by having adequate savings, we need some ideas of what to do to fix the bad credit and bring our credit score back up. Here’s some ideas: Delete Collection Accounts The best way to handle this is to contact the collection agency and explain that you are willing to pay off the collection account under the condition that the all reporting is withdrawn from credit bureaus. Request a letter from the collector that explicitly states their agreement to delete the account upon receipt/clearance of your payment. Although not all collection agencies will delete reporting, removing all references to a collection account completely will increase your score and is certainly worth the involved effort. Delete Past Due Accounts Within the delinquent accounts on your credit report, there is a column called "Past Due". Credit score software penalizes you for keeping accounts past due, so Past Dues destroy a credit score. If you see an amount in this column, pay the creditor the past due amount reported. Delete Charge Offs and Liens Charge Offs and liens do not affect your credit score when older than 24 months. Charge offs and liens within the past 24 months severely damage your credit score. Paying the past due balance, in this case, is very important. If you have both charged off accounts and collection accounts, but limited funds, pay the past due balances first, then pay collection agencies that agree to remove all references to credit bureaus second.
  24. 24. Repairing Your Credit FIXING BAD CREDIT CONT. Delete Late Payments Contact all creditors that report late payments on your credit and request a good faith adjustment that removes the late payments reported on your account. Be persistent if they refuse to remove the late payments at first, and remind them that you have been a good customer that would deeply appreciate their help. Since most creditors receive calls within a call center, if the representative refuses to make a courtesy adjustment on your account, call back and try again with someone else or ask for a manager. Persistence and politeness pays off in this scenario. Check your credit limits Make sure creditors report your credit limits to bureaus. When no limit is reported, credit scoring software scores the account as though your current balance is "maxed out. There are different degrees that scoring software can impact your score when carrying credit card balances. Balances over 70% of your total credit limit on any card damages your score the most. The next level is 50% of your balance, then 30% of your balance. Evenly distribute credit card balances In order to maximize your score without having to pay down your balances, evenly distribute your credit card balances among all of your credit cards, rather than carry a large balance on one credit card. For example, if you are carrying a $9,000 balance on a credit card with a $10,000 limit, and you have two other credit cards with a $3,000 and $5,000 limit, transfer your balances so that you have a $1,500 balance on the $3,000 limit card, a $2,500 balance on the $5,000 limit card and a $5,000 balance on the $10,000 limit card. Evenly distributing your balances will maximize your score.
  25. 25. Repairing Your Credit FIXING BAD CREDIT CONT. Don’t close your credit cards Closing a credit card can hurt your credit score, since doing so effects your debt to available credit ratio. For example, if you owe a total credit card debt of $10,000 and your total credit available is $20,000, you are using 50% of your total credit. If you close a credit card with a $5,000 credit limit, you will reduce your credit available to $15,000 and change your ratio to using 66% of your credit. Keep your old credit cards active 15% of your credit score is determined by the age of the credit file. Fair Isaac's credit scoring software assumes people who have had credit for a longer time are at less risk of defaulting on payments. Therefore, even if your old credit cards have horrible interest rates, closing those cards will decrease the average length of time you've had credit. Use the old card FOR A SMALL PURCHASE ONLY at least once every six months to avoid the account rating to change to "Inactive“, then pay the balance immediately. An inactive account is ignored by Fair Isaac's credit scoring software, so you won't get the benefit of the positive payment history and low balance that card may have. The one thing all credit reports with scores over 800 have in common is a credit card that is twenty years old or older. Hold onto those old cards! Create and stick to a budget People don’t plan to fail, they just fail to plan. If you’re in debt make a plan to get out of debt. Create a workable budget plan and stick to it. Make getting out of debt a priority and stop wasteful spending. Make sacrifices now to be debt free later.
  26. 26. Thank you! Questions? Rick Zimmerman