Credit Report Basics

Do I have a right to know what's in my report?

Of course. By law, they must give you a free credit report every three years. The agencies must give you a free report annually.

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 recorded in your credit report. They may also provide information about your employment history, home ownership, income, and previous address, if creditor requests this type of information.

Public record information
Events that are a matter of public record, such as bankruptcies, foreclosures, or tax liens, may appear in your report.

Inquiries
CRAs must maintain a record of all creditors who have asked for your credit history within the past year. It is usually beneficial to keep the number of inquiries as low as possible.

Payment history
Your accounts with different creditors are listed, and the balances, high balances, and outstanding balances are listed. Related events, such as referral of an overdue account to a collection agency, charge off accounts or other delinquencies may also be noted.

Credit scoring is a system creditors use to help determine your creditworthiness. 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. The credit agencies use sophisticated algorithms to assign a score representing your creditworthiness based on your credit history, payment history, number of accounts, balance of existing accounts, and delinquent accounts, if there are any.

Because your credit report is an important part of many credit scoring systems, it is crucial 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 companies may charge you up to $9.00 for your credit report, but everyone gets one free credit report per year! Go to Free Annual Credit Report for your free annual credit report. There is no obligation as law mandates this service.

Credit scoring is used as a gauge of scoring individuals and assessing a creditworthiness to them based on their credit history.

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 is a major factor in credit scoring. If you have paid bills late, have collections, or declared bankruptcy, these events will not reflect well in your credit score.
• How long is your credit history? The longer your history of holding accounts is, the more trusted you will be like a borrower.
• Have you applied for new credit recently? If you have many recent inquiries this can be construed as being negative by the credit reporting agencies. Only apply for credit when you really want it.
• 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. It is important to not avoid them altogether, though. Having three to four credit cards is a good baseline.
• What is your outstanding debt? It is important that you are not using all of your available credit. If all of your credit cards are maxed out, your scores will reflect that you are not managing your debt wisely. DO NOT USE MORE THAN FIFTY PERCENT OF YOUR AVAILABLE CREDIT ON EACH CREDIT CARD!

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.

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.