Understanding Credit Reports
A
lender told you to get a copy of your credit report as part of the
pre-qualifying process for a mortgage. The purpose, he said, was to see how your
credit looked and to clear up any errors that might be in the report.
But
now that you've got it, there are an awful lot of numbers, abbreviations and
terms you've never seen before. Trade lines, charge-offs, account review
inquiries -- how do you read this thing?
First off, there are three major credit-reporting agencies in the United States:
Experian, TransUnion and Equifax.
Order a copy of your credit report and review it for any errors. Costs vary from
state to state, but in most states, it costs $9 to get your report.
Equifax,
TransUnion and
Experian
all allow you to review your report online.
Plus thanks to a
new
federal law
you'll now be entitled to one free credit report from each of these credit
reporting agencies per year. Consumers in western states became eligible to
request their free annual credit report Dec. 1, but if you live on the East
coast you'll have to wait until Sept. 1, 2005.
The reports will not automatically be sent out. Each consumer must request their
reports one of these three ways. Go to
www.annualcreditreport.com, which is the only authorized source for
consumers to access their annual credit report online for free. Or, call
877-322-8228. Lastly, you may complete the form on the back of the
Annual Credit Report Request brochure, and mail it to: Annual Credit Report
Request Service, P.O. Box 105281, Atlanta, GA, 30348-5281. One more caveat:
you'll be able to order all three credit reports at one time, or at different
times throughout the year. It's your choice. But, be sure to order from the
centralized agency. If you go directly to the credit reporting agencies, you
will be charged unless you fit another criteria for a free report.
The new ruling doesn't replace the other ways to receive a free credit report.
You're still entitled to a free credit report if: you've been denied a loan,
insurance or job based on your credit report; you're applying for unemployment
or receive public assistance; and you currently reside in a state that already
offers an annual free credit report from each credit reporting agency (Colorado,
Maine, Massachusetts, Maryland, New Jersey and Vermont. Georgia residents are
entitled to two free annual credit reports from each credit reporting agency.)
"Looking
at one is a useless endeavor; you need to look at all three," says Howard
Dvorkin, president of Consolidated Credit Counseling Services in Fort
Lauderdale, Fla. "People tend to pull one and think everything is the same on
all of them. That's not normally the case."
The
reports will have different information because it's a voluntary system, and
creditors subscribe to whichever agency they want -- if any at all.
Maxine Sweet, vice president of consumer education at Experian, stresses the
importance of ordering the report directly from the credit bureau instead of
asking a buddy who works at a bank to pull one for you. Those are written for
people who work in the credit industry. The one you get from the credit bureau
is designed for consumers.
"The
information is the same, but it's much more consumer friendly," she says.
Well, not quite the same. The report sent to a lender will list the credit
bureau member numbers of your creditors and it won't have the complete list of
every company that's pulled your credit information for promotional purposes,
like pre-approved credit card offers.
"If
you compared the two reports side by side, the consumer one will have a couple
more pages of information," says John Ulzheimer, client support specialist for
credit bureau products at Fair, Isaac and Co. Fair, Isaac is the creator of the
FICO score, the widely used credit scoring model that is used to determine a
person's credit risk.
Anatomy of a credit report
A credit report is
basically divided into four sections: identifying information, credit history,
public records, and inquiries.
Identifying information is just that -- information to identify you. Look at it
closely to make sure it's accurate. It's not unusual, Sweet says, for there to
be two or three spellings of your name or more than one Social Security number.
That's usually because someone reported the information that way. The variations
will stay on your credit report; "If it's reported wrong, we leave it because it
might mess up the link. Don't be concerned about variations."
Other
information might include your current and previous addresses, your date of
birth, telephone numbers, driver's license numbers, your employer and your
spouse's name.
The
next section is your credit history. Sometimes, the individual accounts are
called trade lines.
Each account will include the name of the creditor and the account number, which
may be scrambled for security purposes. You may have more than one account from
a creditor. Many creditors have more than one kind of account, or if you move,
they transfer your account to a new location and assign a new number. The entry
will also include:
·
When you opened the
account;
·
The kind of credit
(installment, such as a mortgage or car loan, or revolving, such as a department
store credit card);
·
Whether the account is
in your name alone or with another person;
·
Total amount of the
loan, high credit limit or highest balance on the card;
·
How much you still owe;
·
Fixed monthly payments
or minimum monthly amount;
·
Status of the account
(open, inactive, closed, paid, etc.);
·
How well you've paid the
account.
On
Experian's report, your payment history is written in plain English -- never
pays late, typically pays 30 days late, etc. Other comments might include
internal collection and charged off or default.
"Charged off means the creditor has given up, thrown in the towel," Ulzheimer
says. "He's made efforts to collect and written it off."
Other
reports use payment codes ranging from 1 to 9; an R1 or I1 on a report is an
indication of a good payment history on a revolving or installment account.
Better off blank
The next section is the
part you want to be absolutely blank. The public records section "is never a
good story," Sweet says. "If you have a public record on there, you've had a
problem."
It
doesn't list arrests and criminal activities; just financial-related data, such
as bankruptcies, judgments and tax liens. Those are the monsters that will trash
your credit faster than anything else.
The
final section is the inquiries. That's a list of everyone who asked to see your
credit report.
"Any
time anyone gets into the report, it'll post an inquiry," Ulzheimer says. "If
you call the credit bureau and ask for a copy, it will be on there. It's a very
detailed entry record. It's great for the consumer."
Inquiries are divided into two sections. "Hard" inquiries are ones you initiate
by filling out a credit application or taking your child to the orthodontist.
"Soft" inquiries are from companies that want to send out promotional
information to a pre-qualified group or current creditors who are monitoring
your account.
You
may have heard that a large number of inquiries can have a negative impact on
your credit score, but you're probably OK.
"The
vast majority of inquiries are ignored by the FICO scoring models," Ulzheimer
says. "They're not the steak in the steak dinner."
For
instance, the model has a buffer period that ignores inquiries within 30 days of
getting a mortgage or a car loan. It also counts two or more "hard" inquiries in
the same 14-day period as just one inquiry.
"You
could have 30 in two weeks and it only counts as one," Ulzheimer says.
If
you find a mistake on your credit report -- an account that isn't yours or a
disputed amount -- you'll need to fill out the form that comes with the report,
or follow the instructions on the explanatory sheet.
The
process takes time because the creditors have 30 days to respond to a charge of
a discrepancy. As long as a charge is in dispute, that dispute will show up on
your report. Long-time lenders say it's common for reports to have errors. Some
estimate that as many as 80 percent of all credit reports have some kind of
misinformation.
Mortgage Glossary2
