What is a credit
report?
Do I have a right to
know what's in my
report?
What type of
information do
credit bureaus
collect and sell?
What is credit
scoring?
Why is credit
scoring used?
How is a credit
scoring model
developed?
How reliable is the
credit scoring
system?
What can I do to
improve my score?
What happens if you
are denied credit or
don't get the terms
you want?
Fair Credit
Reporting Act
What is a credit
report?
Your credit payment
history is recorded
in a file or report.
These files or
reports are
maintained and sold
by "consumer
reporting agencies"
(CRAs). One type of
CRA is commonly
known as a credit
bureau. You have a
credit record on
file at a credit
bureau if you have
ever applied for a
credit or charge
account, a personal
loan, insurance, or
a job. Your credit
record contains
information about
your income, debts,
and credit payment
history. It also
indicates whether
you have been sued,
arrested, or have
filed for
bankruptcy.
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Do I have a right to
know what's in my
report?
Yes, if you ask for
it. The CRA must
tell you everything
in your report,
including medical
information, and in
most cases, the
sources of the
information. The CRA
also must give you a
list of everyone who
has requested your
report within the
past year-two years
for employment
related requests.
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What type of
information do
credit bureaus
collect and sell?
Credit bureaus
collect and sell
four basic types of
information:
Identification and
employment
information
Your name, birth
date, Social
Security number,
employer, and
spouse's name are
routinely noted. The
CRA also may provide
information about
your employment
history, home
ownership, income,
and previous
address, if a
creditor requests
this type of
information.
Payment history
Your accounts with
different creditors
are listed, showing
how much credit has
been extended and
whether you've paid
on time. Related
events, such as
referral of an
overdue account to a
collection agency,
may also be noted.
Inquiries
CRAs must maintain a
record of all
creditors who have
asked for your
credit history
within the past
year, and a record
of those persons or
businesses
requesting your
credit history for
employment purposes
for the past two
years.
Public record
information
Events that are a
matter of public
record, such as
bankruptcies,
foreclosures, or tax
liens, may appear in
your report.
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What is credit
scoring?
Credit scoring is a
system creditors use
to help determine
whether to give you
credit. Information
about you and your
credit experiences,
such as your
bill-paying history,
the number and type
of accounts you
have, late payments,
collection actions,
outstanding debt,
and the age of your
accounts, is
collected from your
credit application
and your credit
report. 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.
Because your credit
report is an
important part of
many credit scoring
systems, it is very
important to make
sure it's accurate
before you submit a
credit application.
To get copies of
your report, contact
the three major
credit reporting
agencies:
Equifax: (800)
685-1111
Experian (formerly
TRW): (888) EXPERIAN
(397-3742)
Trans Union: (800)
916-8800
These agencies may
charge you up to
$9.00 for your
credit report.
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Why is credit
scoring used?
Credit scoring is
based on real data
and statistics, so
it usually is more
reliable than
subjective or
judgmental methods.
It treats all
applicants
objectively.
Judgmental methods
typically rely on
criteria that are
not systematically
tested and can vary
when applied by
different
individuals.
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How is a credit
scoring model
developed?
To develop a model,
a creditor selects a
random sample of its
customers, or a
sample of similar
customers if their
sample is not large
enough, and analyzes
it statistically to
identify
characteristics that
relate to
creditworthiness.
Then, each of these
factors is assigned
a weight based on
how strong a
predictor it is of
who would be a good
credit risk. Each
creditor may use its
own credit scoring
model, different
scoring models for
different types of
credit, or a generic
model developed by a
credit scoring
company.
Under the Equal
Credit Opportunity
Act, a credit
scoring system may
not use certain
characteristics like
-- race, sex,
marital status,
national origin, or
religion -- as
factors. However,
creditors are
allowed to use age
in properly designed
scoring systems. But
any scoring system
that includes age
must give equal
treatment to elderly
applicants.
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How reliable is the
credit scoring
system?
Credit scoring
systems enable
creditors to
evaluate millions of
applicants
consistently and
impartially on many
different
characteristics. But
to be statistically
valid, credit
scoring systems must
be based on a big
enough sample.
Remember that these
systems generally
vary from creditor
to creditor.
Although you may
think such a system
is arbitrary or
impersonal, it can
help make decisions
faster, more
accurately, and more
impartially than
individuals when it
is properly
designed. And many
creditors design
their systems so
that in marginal
cases, applicants
whose scores are not
high enough to pass
easily or are low
enough to fail
absolutely are
referred to a credit
manager who decides
whether the company
or lender will
extend credit. This
may allow for
discussion and
negotiation between
the credit manager
and the consumer.
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What can I do to
improve my score?
Credit scoring
models are complex
and often vary among
creditors and for
different types of
credit. If one
factor changes, your
score may change --
but improvement
generally depends on
how that factor
relates to other
factors considered
by the model. Only
the creditor can
explain what might
improve your score
under the particular
model used to
evaluate your credit
application.
Nevertheless,
scoring models
generally evaluate
the following types
of information in
your credit report:
-
Have you paid
your bills on
time?
Payment history
typically is a
significant
factor. It is
likely that your
score will be
affected
negatively if
you have paid
bills late, had
an account
referred to
collections, or
declared
bankruptcy, if
that history is
reflected on
your credit
report.
-
What is your
outstanding
debt?
Many scoring
models evaluate
the amount of
debt you have
compared to your
credit limits.
If the amount
you owe is close
to your credit
limit, that is
likely to have a
negative effect
on your score.
-
How long is your
credit history?
Generally,
models consider
the length of
your credit
track record. An
insufficient
credit history
may have an
effect on your
score, but that
can be offset by
other factors,
such as timely
payments and low
balances.
-
Have you applied
for new credit
recently?
Many scoring
models consider
whether you have
applied for
credit recently
by looking at
"inquiries" on
your credit
report when you
apply for
credit. If you
have applied for
too many new
accounts
recently, that
may negatively
affect your
score. However,
not all
inquiries are
counted.
Inquiries by
creditors who
are monitoring
your account or
looking at
credit reports
to make
"prescreened"
credit offers
are not counted.
-
How many and
what types of
credit accounts
do you have? Although it is generally good to have established
credit accounts,
too many credit
card accounts
may have a
negative effect
on your score.
In addition,
many models
consider the
type of credit
accounts you
have. For
example, under
some scoring
models, loans
from finance
companies may
negatively
affect your
credit score.
Scoring models may
be based on more
than just
information in your
credit report. For
example, the model
may consider
information from
your credit
application as well:
your job or
occupation, length
of employment, or
whether you own a
home.
To improve your
credit score under
most models,
concentrate on
paying your bills on
time, paying down
outstanding
balances, and not
taking on new debt.
It's likely to take
some time to improve
your score
significantly.
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What happens if you
are denied credit or
don't get the terms
you want?
If you are denied
credit, the Equal
Credit Opportunity
Act requires that
the creditor give
you a notice that
tells you the
specific reasons
your application was
rejected or the fact
that you have the
right to learn the
reasons if you ask
within 60 days.
Indefinite and vague
reasons for denial
are illegal, so ask
the creditor to be
specific. Acceptable
reasons include:
"Your income was
low" or "You haven't
been employed long
enough."
Unacceptable reasons
include: "You didn't
meet our minimum
standards" or "You
didn't receive
enough points on our
credit scoring
system."
If a creditor says
you were denied
credit because you
are too near your
credit limits on
your charge cards or
you have too many
credit card
accounts, you may
want to reapply
after paying down
your balances or
closing some
accounts. Credit
scoring systems
consider updated
information and
change over time.
Sometimes you can be
denied credit
because of
information from a
credit report. If
so, the Fair Credit
Reporting Act
requires the
creditor to give you
the name, address
and phone number of
the credit reporting
agency that supplied
the information. You
should contact that
agency to find out
what your report
said. This
information is free
if you request it
within 60 days of
being turned down
for credit. The
credit reporting
agency can tell you
what's in your
report, but only the
creditor can tell
you why your
application was
denied.
If you've been
denied credit, or
didn't get the rate
or credit terms you
want, ask the
creditor if a credit
scoring system was
used. If so, ask
what characteristics
or factors were used
in that system, and
the best ways to
improve your
application. If you
get credit, ask the
creditor whether you
are getting the best
rate and terms
available and, if
not, why. If you are
not offered the best
rate available
because of
inaccuracies in your
credit report, be
sure to dispute the
inaccurate
information in your
credit report.
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Fair Credit
Reporting Act
The Fair Credit
Reporting Act (FCRA)
is designed to help
ensure that CRAs
furnish correct and
complete information
to businesses to use
when evaluating your
application.
Your rights under
the Fair Credit
Reporting Act:
-
You have the right to receive a copy of your
credit report.
The copy of your
report must
contain all of
the information
in your file at
the time of your
request.
-
You have the right to know the name of anyone who
received your
credit report in
the last year
for most
purposes or in
the last two
years for
employment
purposes.
-
Any company that denies your application must
supply the name
and address of
the CRA they
contacted,
provided the
denial was based
on information
given by the CRA.
-
You have the right to a free copy of your credit
report when your
application is
denied because
of information
supplied by the
CRA. Your
request must be
made within 60
days of
receiving your
denial notice.
-
If you contest the completeness or accuracy of
information in
your report, you
should file a
dispute with the
CRA and with the
company that
furnished the
information to
the CRA. Both
the CRA and the
furnisher of
information are
legally
obligated to
reinvestigate
your dispute.
-
You have a right to add a summary explanation to
your credit
report if your
dispute is not
resolved to your
satisfaction.
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