How Credit Is Established and Judged
How Credit Is Established and Judged
When you first become a consumer, you start with a clean slate since you haven't established a credit history. There's no record of how you spent your childhood allowances or money you earned from odd jobs, or how well you budgeted and saved to spend on holiday presents.
But as soon as you open a checking account or get your first credit card, all of that changes. Now the watchful eyes of the credit companies are upon you, and your financial transactions become a roadmap to your purchasing and spending habits. From this point forward, these companies will record your credit transactions and any transgressions, such as overdue payments.
The simple act of applying for a credit card—even if you don't accept the card—affects your credit. Should you make a late payment on a credit card, a negative mark goes against your credit rating. If you overdraw your checking account, a negative mark goes against your credit rating. The company or bank that issues the credit card makes these reports and sends them to the companies that keep track of credit activities.
Are you starting to see a pattern here? I hope so!
There are three companies that track the credit activities of American consumers: Equifax, Experian, and Trans Union. These companies maintain records on everyone with a recorded credit history, and they make their reports available to any company or organization that you authorize to check your credit history.
Information that Appears on a Credit Report
There are several pieces of information that appear on your credit report. First, you'll find the name of all the companies to which you owe money and the amounts that you owe. Second, you'll see the length of time each account has been open. The report also lists your relationship to credit transactions. For example, if you are married and a debt is jointly owned by you and your spouse, that information appears on your credit report.
Your credit report also shows any history of late payments. So even if you paid off and closed your account, the history of the account may still appear on the credit report. And the report also includes public records of liens, repossessions, foreclosures, and bankruptcies in which you have been involved.
Typically, information about your credit transactions stays on your credit report for seven years. After seven years, the old information is no longer included in your report.
Fair Isaac & Company developed a process that rates credit worthiness with a single number. In addition to the financial transactions displayed on your credit report, your credit report contains a rating. This rating is the FICO score, or Fair Isaac score, calculated by a mathematical formula that evaluates information on your credit report. Your FICO score changes over time, and the FICO score at one credit bureau may differ from that at another, based on information in a particular credit report.
The FICO score considers a number of criteria, including your payment history, the total amounts you owe, and how long your credit history has existed. Various types of debt that appear on your credit report also affect the score, as well as whether you've applied for additional debt. You can purchase a copy of your TransUnion and Equifax credit scores at the FICO website on the Internet, at www.myfico.com. The cost is $31.90.
When you apply for a credit card, the store or financial institution that issues the card requests a copy of your credit report from one of the three companies mentioned above. The store or financial institution will make a decision about whether or not to issue the card, and how much credit to give you based on the information in the credit report.
Request Your Own Credit Report
At any time, you can purchase your own credit report from one of the companies listed in this lesson. The price is low; it ranges from $8 to $25 per report. Also, see "Free Credit Reports," below as you are able to get one, free credit report a year from all three agencies.
If a company or bank rejects you for credit based on a report from one of these companies, that company or bank must tell you which company supplied the credit report. If this happens, the credit report company will provide you with a copy of your credit report for free.
You can contact the credit companies by telephone, by mail, or on the Internet. Costs of credit reports vary depending on the state you live in and other circumstances, such as whether you've recently applied for a credit report or whether a bank has rejected you for credit.
If you're interested in acquiring your credit report, you'll find further information in the Supplementary Material section of this lesson.
Free Credit Reports
As
a result of a new program initiated in 2005, you can receive one copy
of each of your three credit reports at no charge, once a year. For a
link to the website where you can request reports: http://www.annualcreditreport.com
You can view the reports online or request for copies in the mail.
You can request all three reports at once, or you can request the
reports one at a time, at different times throughout the year. Return to
the same website each year to request new reports.
Common Credit Report Errors
Don't assume the information on a credit report is correct. Credit reports are not infallible. In fact, a study performed by the Consumer's Union found that nearly half of the credit reports in circulation contain errors or outdated information. It's wise to obtain a copy of your credit report from time to time and examine the report for accuracy.
A common error that can appear on a credit report is out-of-date information, such as account balances that you've paid off but show up as unpaid. Another common credit report error is the failure to note agreements on disputes with creditors that were resolved in your favor. Sometimes a credit report will contain financial information of another person who has been confused with you.
So you can see the importance of staying on top of your credit history! In the next chapter, we'll look at how to take control of your credit history—correcting errors and straightin out your report.
When you first become a consumer, you start with a clean slate since you haven't established a credit history. There's no record of how you spent your childhood allowances or money you earned from odd jobs, or how well you budgeted and saved to spend on holiday presents.
But as soon as you open a checking account or get your first credit card, all of that changes. Now the watchful eyes of the credit companies are upon you, and your financial transactions become a roadmap to your purchasing and spending habits. From this point forward, these companies will record your credit transactions and any transgressions, such as overdue payments.
The simple act of applying for a credit card—even if you don't accept the card—affects your credit. Should you make a late payment on a credit card, a negative mark goes against your credit rating. If you overdraw your checking account, a negative mark goes against your credit rating. The company or bank that issues the credit card makes these reports and sends them to the companies that keep track of credit activities.
Are you starting to see a pattern here? I hope so!
There are three companies that track the credit activities of American consumers: Equifax, Experian, and Trans Union. These companies maintain records on everyone with a recorded credit history, and they make their reports available to any company or organization that you authorize to check your credit history.
Information that Appears on a Credit Report
There are several pieces of information that appear on your credit report. First, you'll find the name of all the companies to which you owe money and the amounts that you owe. Second, you'll see the length of time each account has been open. The report also lists your relationship to credit transactions. For example, if you are married and a debt is jointly owned by you and your spouse, that information appears on your credit report.
Your credit report also shows any history of late payments. So even if you paid off and closed your account, the history of the account may still appear on the credit report. And the report also includes public records of liens, repossessions, foreclosures, and bankruptcies in which you have been involved.
Typically, information about your credit transactions stays on your credit report for seven years. After seven years, the old information is no longer included in your report.
Fair Isaac & Company developed a process that rates credit worthiness with a single number. In addition to the financial transactions displayed on your credit report, your credit report contains a rating. This rating is the FICO score, or Fair Isaac score, calculated by a mathematical formula that evaluates information on your credit report. Your FICO score changes over time, and the FICO score at one credit bureau may differ from that at another, based on information in a particular credit report.
The FICO score considers a number of criteria, including your payment history, the total amounts you owe, and how long your credit history has existed. Various types of debt that appear on your credit report also affect the score, as well as whether you've applied for additional debt. You can purchase a copy of your TransUnion and Equifax credit scores at the FICO website on the Internet, at www.myfico.com. The cost is $31.90.
When you apply for a credit card, the store or financial institution that issues the card requests a copy of your credit report from one of the three companies mentioned above. The store or financial institution will make a decision about whether or not to issue the card, and how much credit to give you based on the information in the credit report.
Request Your Own Credit Report
At any time, you can purchase your own credit report from one of the companies listed in this lesson. The price is low; it ranges from $8 to $25 per report. Also, see "Free Credit Reports," below as you are able to get one, free credit report a year from all three agencies.
If a company or bank rejects you for credit based on a report from one of these companies, that company or bank must tell you which company supplied the credit report. If this happens, the credit report company will provide you with a copy of your credit report for free.
You can contact the credit companies by telephone, by mail, or on the Internet. Costs of credit reports vary depending on the state you live in and other circumstances, such as whether you've recently applied for a credit report or whether a bank has rejected you for credit.
If you're interested in acquiring your credit report, you'll find further information in the Supplementary Material section of this lesson.
Free Credit Reports
Go
to this website to request one copy of your credit report from each of
the three reporting agencies at no charge, once a year. You can request
all three reports at once or request each of them separately at
different times of the year.Be sure to go to only
this website for your free reports. Other websites appear to offer free
reports but often tack on other charges.
Common Credit Report Errors
Don't assume the information on a credit report is correct. Credit reports are not infallible. In fact, a study performed by the Consumer's Union found that nearly half of the credit reports in circulation contain errors or outdated information. It's wise to obtain a copy of your credit report from time to time and examine the report for accuracy.
A common error that can appear on a credit report is out-of-date information, such as account balances that you've paid off but show up as unpaid. Another common credit report error is the failure to note agreements on disputes with creditors that were resolved in your favor. Sometimes a credit report will contain financial information of another person who has been confused with you.
So you can see the importance of staying on top of your credit history! In the next chapter, we'll look at how to take control of your credit history—correcting errors and straightin out your report.
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