The information in your credit report is one of the two determining factors that affect the quantity and cost of credit available to you (the other being your income level). In today’s modern consumer society, the use of credit is ubiquitous. Credit cards, automobile loans, installment loans for new appliances, and home mortgages are just a few examples of the way credit is commonly used. To say the least, life would be quite different without these various forms of credit. While the use of credit works well for the great majority of Americans, there are some who, for one reason or another, develop a history of not repaying their debt obligations in a timely way. Your credit report and credit score are intended to be an objective measurement of your personal credit worthiness – a measure that is completely independent of your race, gender, age, or place of national origin. Your credit report and credit score are intended to ensure that you will be treated fairly when you apply for credit.
Where Does The Information In Credit Reports Come From?
Many businesses see the ability to sell their products and services on credit as being a significant advantage. To minimize the obvious risks of extending credit, many businesses sign up as “data furnishers” to at least one of the country’s three major credit reporting agencies (Equifax, Experian, or TransUnion). Using software provided by the selected reporting agency, the businesses enter identifying information about you, the borrower, and then make regular entries regarding the timeliness of your payments, and whether or not you completely repay the loan. Being a data furnisher for a credit reporting agency is presumed to have a deterring effect on persons likely to not repay their loans. That advantage, however, carries with it an obligation to report all credit related transactions fairly and accurately.
Credit reporting agencies may also collect information from the public record. Public record information comes from courts, and includes liens placed on property, collection activities, bankruptcies, real estate foreclosures, etc.
The collected information is then passed to companies such as FICO which aggregates information from credit rating agencies, court records and a variety of other sources into your personal FICO credit report.
How Does FICO Use The Information In Your Credit Reports?
FICO presumes that the information they receive from credit rating agencies is accurate. Individuals have the right to review the information in each credit report provided to FICO by the three credit reporting agencies, and contest any information they believe is inaccurate or untrue. Information not successfully contested is then used to calculate credit scores. FICO scores for consumers take into account:
- Payment history (35%) – Were monthly payments made on time and in full?
- Debt (30%) – This category considers both the amount of debt and types of debt incurred. Types of debt include Revolving Debt (Credit Cards), Installment Debt (Auto or Appliance loans), and those debts which must be paid in each month (some store credit cards and the original American Express Card).
- The length of your credit history (15%) – This is determined two ways; how long your credit file has been open, and the average age of the accounts on your credit file.
- Account Diversity (10%) – Your credit score will benefit by showing successful repayment of a diverse set of account types on your credit file
- Recent Authorized Credit Inquiries (10%) – So-called “hard Inquiries” indicating that you have been actively applying for one or more new lines of credit. A few are OK, but too many too fast can indicate a problem.
When you authorize a potential lender to “pull a credit check on you”, FICO provides the requested information to your lender for a fee. Presuming that your credit score is high enough, and information behind it is accurate, you realize the benefit of an objective analysis of your credit worthiness.
How Do I Make Sure The Information In My FICO File Is Accurate?
By law you are entitled to one free credit report per year from each of the three major credit reporting agencies. One of the principle intentions of this country’s credit reporting system is to protect your rights as a borrower. Credit reporting systems only works correctly in this regard if each individual takes responsibility for checking their own individual credit reports periodically. Errors do occur, including:
- The inclusion of potentially injurious credit related transactions engaged in by persons other than you. These errors may be the result of outright identity theft, miss entry of identifying information by the vendor issuing you credit, careless in recording your payment history, or even simple confusion arising from chance similarities between your identifying information and that of other individuals with similar names, addresses, or other elements of personal information.
- Inaccurate reports of late payments.
- Failure to include information that a loan has been paid in full.
- Failure to note closed store or revolving credit card accounts.
What Do I Do If I Find Mistakes?
If you find inaccurate or incomplete information in your credit report you need to:
- Contact both the credit reporting agency (Equifax, Experian, or TransUnion) and the company that provided the information to the CRA.
- Tell the credit reporting agency in writing what information you believe is inaccurate. Keep a copy of all correspondence.
Under The Fair Credit Reporting Act, the information provider is required to investigate and report the results to the credit reporting agency within 30 days. If the information is found to be incorrect, the information provider must notify all nationwide credit reporting agencies to correct your file. If the data provider’s investigation does not resolve your dispute, request in writing that notice of the dispute be included in your file, and reported every time the disputed information is released. If carelessness played a role in reporting inaccurate or incomplete information, the provider may be liable for civil damages. In most cases, however, the dispute resolution process ends successfully.