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If you've ever applied for a credit card, a loan to buy a house or car, or a line of credit to make some other large purchase, then you've probably had your credit report reviewed by the lender.

If your report says you don't pay your bills on time, or that you have a lot of debt, you may not get that loan -- or you may get it but have to pay a higher interest rate.

Because it can have such an impact on the things you do in your life, you should make sure that your credit report is accurate and that you understand how it affects the credit you can get. is the official site to help consumers to obtain their free credit report.

To Order Your Free Annual Credit Report:

source: Federal Trade Commission


Credit Score vs Credit Report

You've probably heard about a credit score as well. Don't confuse your credit score with your credit report. Credit scores are based on formulas that use the information in your report, but they are not a part of your report. Fair, Isaac and Company came up with a proprietary scoring formula that most creditors use, although there are other scoring methods that are used for various purposes. This score essentially boils down all of the information in your credit report to a single three-digit number. This gives creditors an easier way of making decisions about your creditworthiness. These numbers range from 300 to 850, with the higher number indicating a better credit risk. Read How Credit Scores Work to get the full scoop on how much a single number can affect your life.

How Credit Scores Work

We apply for credit for many reasons -- maybe it's to buy a new car, house, computer, or get a student loan. Did you know, however, that there is a special number that can determine whether you can do these things, or at least how much it will cost you? Your credit score is a three-digit number that can do just that.

How can a single number be meaningful enough to determine whether you can buy a house or car? If you've read How Credit Reports Work, you know that your credit report contains a history of how you've paid your bills, how much open credit you have, and anything else that would affect your creditworthiness. Your credit score boils down all of that information into a three-digit number.

A credit score is a number that is calculated based on your credit history to give lenders a simpler "lend/don't lend" answer for people who are applying for credit or loans. This number helps the lender identify the level of risk they may be taking if they lend to someone. While the same end result can come through reviewing the actual credit report (which lenders usually do), the credit score is quicker and less subjective. The system awards points based on information in the credit report, and the resulting score is compared to that of other consumers with similar profiles. With this information, lenders can predict how likely someone is to repay a loan and make payments on time. It's the credit score that makes it possible to get instant credit at places like electronics stores and department stores.

Although there are several scoring methods, the score most commonly used by lenders is known as a FICO because of its origins with Fair Isaac and Company. Fair Isaac is an independent company that came up with the scoring method and software used by banks and lenders, insurers and other businesses. Each of the three major credit bureaus (Experian, Equifax and TransUnion) worked with Fair Isaac in the early 1980's to come up with the scoring method.

Three Types of Credit Scores: Beacon, Impirica and FICO

The three national credit bureaus each have their own version of the FICO score with their own names.

Each is based on the original Fair Isaac FICO scoring method and produces equivalent numerical results for any given credit report. Some lenders also have their own scoring methods. Other scoring methods may include information such as your income or how long you've been at the same job.

Accessing Your Score

Until recently, your credit score was not available to you. Only lenders and other businesses that used the score could access it. Fair Isaac and Company felt that the score would only confuse consumers since there was nothing to tell them what it meant or what the lenders were looking for.

In 2001, however, all of this changed due to pressure from the U.S. Congress, industry, and consumer groups. Now you can get your credit score at a number of Web sites, including the big three credit bureaus, and at Fair Isaac's Web site. You can also ask your lender for access to your score when you apply for a loan.

Credit Score Breakdown

Think of your credit score like you would a grade in school. A teacher calculates grades by taking scores from tests, homework, attendance and anything else they want to use, weighting each one according to importance in order to come up with a final single number (or letter) score. Your credit score is calculated in a very similar manner. Instead of using the scores from pop quizzes and reports you wrote, it uses the information in your credit report.

The number itself can range from 300 to 900. The formula for exactly how the score is calculated is proprietary information and owned by Fair Isaac.

Here, however, is an approximate breakdown of how it is determined:

35 percent (35%) of the score is based on your payment history. This makes sense since one of the primary reasons a lender wants to see the score is to find out if (and how timely) you pay your bills. The score is affected by how many bills have been paid late, how many were sent out for collection, any bankruptcies, etc. When these things happened also comes into play. The more recent, the worse it will be for your overall score.

30 percent (30%) of the score is based on outstanding debt. How much do you owe on car or home loans? How many credit cards do you have that are at their credit limits? The more cards you have at their limits, the lower your score will be. The rule of thumb is to keep your card balances at 25% or less of their limits.

15 percent (15%) of the score is based on the length of time you've had credit. The longer you've had established credit, the better it is for your overall credit score. Why? Because more information about your past payment history gives a more accurate prediction of your future actions.

10 percent (10%) of the score is based on the number of inquiries on your report. If you've applied for a lot of credit cards or loans, you will have a lot of inquiries on your credit report. These are bad for your score because they indicate that you may be in some kind of financial trouble or may be taking on a lot of debt (even if you haven't used the cards or gotten the loans). The more recent these inquiries are, the worse for your credit score. FICO scores only count inquiries from the past year.

10 percent (10%) of the score is based on the types of credit you currently have; installment, revolving and consumer finance. The number of loans and available credit from credit cards you have makes a difference. There is no magic number or combination of types of accounts that you shouldn't have. These actually come more into play if there isn't as much other information on your credit report on which to base the score.

  • Installment credit is a type of credit that has a fixed number of payments, in contrast to revolving credit
  • Revolving credit is a type of credit that does not have a fixed number of payments, in contrast to installment credit. Examples of revolving credits used by consumers include credit cards. Corporate revolving credit facilities are typically used to provide liquidity for a company's day-to-day operations.
  • Consumer finance in the most basic sense of the word refers to any kind of lending to consumers. However, in the United States financial services industry, the term "consumer finance" often refers to a particular type of business, sub prime branch lending (that is lending to people with less than perfect credit). This branch of the financial services industry is more extensive in the United States than in some other countries, because the major banks in the U.S. are less willing to lend to people with marginal credit ratings than their counterparts in many other countries. Examples of these companies include HSBC Finance, CIT, CitiFinancial, and Wells Fargo Financial

The above percentages provide very limited guidance in understanding a credit score. For example, the 10% of the score allocated to "types of credit used" is undefined, leaving consumers unaware what type of credit mix to pursue. "Length of credit history" is also a murky concept; it consists of multiple factors — two being the oldest account open and the average length of time an account has been open. Although only 35% is attributed to punctuality, if a consumer is substantially late on numerous accounts, his score will fall far more than 35%. Bankruptcies, foreclosures, and judgments affect scores substantially.

This information is compared to the credit performance of other consumers with similar histories and profiles.

What Your Score Affects

Your credit score doesn't just affect whether or not you get a loan; it also affects how much that loan is going to cost you. As your credit score increases, your credit risk decreases. This means your interest rate decreases.

There are other factors that influence the interest rate you get for a loan besides your credit score. Things like the type of property you are using the loan to buy, how much of your own money (equity) is going into it, the costs the lender has to make the loan, etc.

In addition to banks and lenders, there are landlords, merchants, employers and insurance companies jumping on the credit score bandwagon. Of all of these, the fact that insurance rates are being determined by credit scores is causing consumers the most alarm. To most, it seems that your credit history and your driving record have little in common. Insurers, on the other hand, have found that using credit scores to predict how likely someone is to pay premiums has helped them cut their losses. They don't use the same score that banks and lenders use, however. They use a slightly different formula for their calculations and actually call it an "insurance score."

Insurers' use of credit histories to determine rates is under scrutiny nationwide. Many states are passing laws restricting this practice. Washington, Utah, Idaho and Maryland have already done so, and 20 more states are considering it. Check Florida State Department of Insurance Web site to see where it stands on the issue.

Improving Your Score

Credit scores aren't static numbers. Because they are calculated based on your current credit report, they change every time your credit report changes. While this change may be very slight, it can also be much more dramatic.

Here are some things some financial advisers say to do to try to improve your score:

  1. Review your credit report and correct any errors you find. Getting rid of inaccurate (and bad) information can sometimes improve your score dramatically.
  2. Advice used to be given to close old and unused credit card accounts in order to reduce your “potential” available credit (which could change your debt ratio after you’ve been approved for a loan). Now, however, the ratio of your debt to your credit limit is more critical, so closing old accounts only raises that ratio – which you don’t want to do. Some people have moved debt from several credit cards to one card and then closed the old accounts. Since creditors look at the debt-to-credit limit ratio this can have a bad affect on your credit score because you have the same amount of debt but less available credit. So don’t close old credit card accounts just because you’re not using them.
  3. Creditors also now look at the average age of your accounts so, again, keep those old accounts.
  4. Reduce your balances on credit cards to 75% or less of your available credit (25% is preferable).
  5. Pay your bills on time. (This is probably the most important of all!)
  6. Don't let anyone make an inquiry on your credit report unless you absolutely have to. The more inquiries, the lower your score.
  7. Don’t open new credit card accounts just to increase your available credit in the hopes of raising your score.
  8. Also, remember that some improvements -- such as better efforts at making payments on time -- may take time to impact your score. So, time is also a factor.

If you go to the bank for a loan and are turned down because your score is too low, your would-be lender will get a list of reasons for that low score. You can use that list to try to turn your score around. While nothing is guaranteed, since lenders can also use their own scoring methods, you certainly can't hurt your score by taking any of these steps.

»Read more about improving your credit score«

What is a Credit Report?

A credit report is an accumulation of information about how you pay your bills and repay loans, how much credit you have available, what your monthly debts are, and other types of information that can help a potential lender decide whether you are a good credit risk or a bad credit risk.

The report itself does not say whether you are a good or bad credit risk -- it provides lenders with the data to make the decision themselves. Credit bureaus, also known as credit reporting agencies (CRAs), collect this information from merchants, lenders, landlords, etc., and then sell the report to businesses so they can evaluate your application for credit. Lenders make their decisions based on different criteria, so having all of the information helps them ensure that they are making the right decision.

Information that makes up your credit report includes:

  • Personal identifying information - This includes your name, address (current and previous), social security number, telephone number, birth date, your current and previous employers, and (on the version you get) your spouse's name may be included as well.
  • Credit history - This section includes your bill-paying history with banks, retail stores, finance companies, mortgage companies, and others who have granted you credit. It includes information about each account you have, such as when it was opened, what type of account it is, how much credit it includes (or the amount of the loan), what your monthly payment is, etc. If you've closed the account or the loan has been paid off, then that information shows up as well. If there were missed or late payments, this is where that appears.
  • Public records - Information that might indicate your credit worthiness, such as tax liens, court judgments and bankruptcies. This information is readily available from public records.
  • Report inquiries - This section includes all credit granters who have received a copy of your credit report. It also includes any others who were authorized to view it. In addition, lists of companies that have received your name and address in order to offer you credit are included. These companies don't actually see your report, but get your name if you meet their criteria for an offer of credit, insurance or other product. This is where all of those "pre-approved" credit card offers come from.
  • Dispute statements - The report may also include any statements you've made disputing information on the report. Most credit bureaus allow both the consumer and the creditor to make statements to report what happened if there is a dispute about something on the report.

Things that don't appear on most credit reports include:

  • Bank account balances
  • Race
  • Religion
  • Health (although medical bills may show up as debts)
  • Criminal records
  • Income
  • Driving records

There are different versions of credit reports available depending upon the requestor. The consumer version includes all of the above information, as well as a listing of all inquiries for the report. The business version includes all of the above information, but only the inquiries made by companies with a "permissible purpose" -- this usually means someone with whom you have initiated business.

How Credit Bureaus Get Information

A credit bureau is a clearinghouse for credit information about consumers. There are more than 1,000 local and regional credit bureaus around the country that gather information about your credit habits directly from your creditors. Typically, these smaller local and regional bureaus are affiliated with one of three large national credit bureaus -- Equifax, Experian and TransUnion (see below).

For example, let's say you apply for a credit card and provide the card company with all of your personal information, such as your name and address, your previous address (if you haven't lived at your current residence for more than two years), your employer, other credit cards you have, etc. The credit card company then contacts a credit reporting agency (CRA) and reviews your credit report. If the company approves your application for a credit card, then the information you've supplied is forwarded to the CRA. That credit card company also reports your payment history to the CRA, so that becomes part of the report. The CRAs also access information about you from public record information such as court records.

All of the transactions you have that involve credit are reported monthly to CRAs by the merchants or creditors you deal with. Most large creditors report this information to all three national credit bureaus (CRAs). Some smaller lenders or merchants, however, may only report the information to one. For this reason, your report from each CRA may not be the same. You might get a copy of your report from Experian that does not include an account that shows up on your report that is maintained by TransUnion. For this reason, it is wise to review copies of all three reports.

Credit Reporting Agencies (CRA's)

You can find the contact information for all three national credit bureaus in the United States.

Equifax – - To order your report, call: 800-685-1111 or write: P.O. Box 740241, Atlanta, GA 30374-0241. To report fraud, call: 800-525-6285/ TDD: 800-255-0056 and write: P.O. Box 740241, Atlanta, GA 30374-0241.

Experian – - To order your report, call: 888-EXPERIAN (397-3742) or write: P.O. Box 2104, Allen, TX 75013. To report fraud, call: 888-EXPERIAN (397-3742)/ TDD: 800-972-0322 and write: P.O. Box 9532, Allen, TX 75013.

TransUnion – - To order your report, call: 800-916-8800 or write: P.O. Box 1000, Chester, PA 19022. To report fraud, call: 800-680-7289/ TDD: 877-553-7803 and write: Fraud Victim Assistance Division, P.O. Box 6790, Fullerton, CA 92634-6790.

While the report itself only relays the history of your dealings with creditors, potential creditors can learn a lot from this.

How Lenders Interpret Your Credit Report

As mentioned on the previous page, your credit report only relays the history of your dealings with creditors. However, you need to look closely. There's information there that may seem innocent to you but not to potential creditors.

This includes information like:

  • Inquiries - Every time you apply for a credit card to get a free travel mug, duffel bag, or T-shirt, you are adding another hard inquiry to your credit report. When potential lenders see these inquiries, it may wrongly imply that you're either in some financial situation where you need a lot of credit, or are planning to take on a large debt. Either can flag you as a high credit risk.
  • Other types of inquiries, such as your own requests to view the report, employer requests to view the report and requests by marketers to get your name in order to sell you something, count as soft inquiries. These inquiries don't show up on the reports that lenders see, and therefore don't affect how they view your credit.
  • Also, watch out when you are car shopping or mortgage shopping. Make sure you don't let the car dealer or mortgage broker run your credit unless you know you're going to be buying from them. While the FCRA allows these types of multiple credit inquiries that are within seven to 14 days of each other to be counted as a single inquiry, you would have to be careful of your timing to make sure you don't have multiple inquiries show up.

So, how many hard inquiries can you have without a problem? Some experts say that if you have 10 credit card inquiries in six months, that will probably scare a lender. Others experts say that as few as six credit card inquiries in six months can label you as risky. Inquiries that are older than six months may not be looked at as strongly because if you actually set up the loan or opened the credit card account, those accounts would now be showing up on your report as well. The newer inquiries might lead the lender to think that you actually have the credit accounts available now but they haven't shown up on the credit report yet. Most inquiries drop off of your report after two years.

  • Open credit accounts - Another thing to watch out for as you gather all of those free mugs and duffel bags is that even though you may have forgotten about them, accounts you don't use still count toward your total available credit. Just as with the hard inquiries we've talked about, these can indicate to a potential lender that you could easily put yourself into financial danger with all of that readily available credit.
  • Closing accounts - According to TransUnion and Experian, you should not close out your oldest card, because it has the most history on it; also, you should maintain four to six credit cards to "keep your credit score and debt balances healthy" [source: TransUnion]. But other than that, close the accounts you don't use. In addition to avoiding excessive available credit, you're limiting your exposure to identity theft. Cutting up the card or just not using it doesn't mean the account is closed. You have to call or write to the card company and ask to close the account.
  • Missed payments - Obviously, your payment history makes a big difference. You should always make at least the minimum payment, or consolidate accounts to reduce your payments. These delinquencies stay on your report for seven years -- even if you've caught up your payments! The same goes for accounts that creditors have turned over to collection agencies or charged-off -- meaning that they've written the account off as a loss. Even if you do pay off the account at a later date, the charge-off or collection action stays on your report for seven years.
  • Maxed-out credit lines - Another thing that scares lenders is a maxed-out credit line (or two). This waves a big red flag and indicates that you may be financially strapped for some reason. Some experts suggest moving debt around if this is the case. For example, if you have a maxed-out card but have other cards that haven't reached their credit limits, you might consider moving some of the debt from the maxed-out card to the non-maxed-out ones.
  • Debt in relation to income - If you have unsecured credit card debt that is more than 20 percent of your annual income, lenders may not want to give you the best deal on a loan -- if they'll take the chance and give you a loan in the first place. Work to reduce the debt-to-income ratio and you'll be able to get better rates on the loans you see.
Access to Credit Reports

The Fair Credit Reporting Act (FCRA) specifies who can access your report and for what reasons. Your credit report can be viewed by people you have initiated business with, such as lenders, landlords, credit card companies and other businesses. Each of these groups must have a "permissible reason" to view your report, and their inquiries count as hard inquiries.
You can also give potential employers written permission to view your report. Because they're only trying to determine your integrity by seeing how you repay and manage your debts, they get a different version than lenders get.

Companies can also get your name and address from credit bureaus in order to send you offers for pre-approved credit cards in the mail or via a dinner-time telemarketing call. These companies don't actually get a copy of or even see your credit report. They have a set of criteria that they use to screen consumers in order to come up with a list of potential customers. They use these lists for their marketing efforts. These inquiries are considered soft inquiries and do not show up on any version of the report except for the version you get. If you don't want to have your name sold to these companies, you can "opt out" by either writing to the three major credit bureaus or by calling 888-5-OPTOUT (888-567-8688). This will remove your name for two years from mailing and telemarketing lists that come from TransUnion, Equifax, Experian, and INNOVIS.

You can (and should) request copies of your report from the three major credit bureaus regularly so you can correct any inaccuracies. According to a 1998 study, "Mistakes Do Happen," conducted by the Public Interest Research Group, 29 percent of consumer credit reports had errors serious enough to cause denial of credit, insurance, etc. The Consumers Union, which publishes Consumer Reports, did a study with similar results. However, the Associated Credit Bureaus (now the Consumer Data Industry Association) sponsored its own study in 1991, and this study reported that less than two-tenths of 1 percent of credit reports contained incorrect information.

As you can see, reviewing your credit report is a good idea. You are are entitled to a free copy of your credit report once every 12 months. The cost of the report is regulated by the Federal Trade Commission as part of the Fair Credit Reporting Act. The FTC usually reviews the cost annually and may increase it to stay in line with inflation. That price limit was increased to $10 in 2005.

The Federal Trade Commission's Fair Credit Reporting Act (FCRA) was put into effect in 1971 to protect consumer rights. The FCRA is the federal law that regulates credit reporting companies. It specifies consumer rights to review the information and contest inaccuracies, as well as defines who can access the reports and for what reasons.

What are your rights under the FCRA?

As a consumer, you have certain rights when it comes to how your credit history is maintained and used. The consumer reporting agencies that collect and maintain this information must abide by rules set up by the FCRA.

These include:

Report access - Only those who have a "permissible purpose" can access your report. This means that only people with whom you've established a business relationship, such as a lender, credit card company, landlord, insurer, employer, etc. can access your report.

Written consent - For reports that are given to employers or potential employers, written consent is required. Also, no medical information can be reported to anyone without your written consent.

Personal access - You have the right to get a copy of your report and a list of everyone who has accessed it. You are entitled to a free copy once every 12- months. These circumstances include: unemployment, welfare, fraud, or if you've been denied credit because of something in your report. In most cases, you have to request your report within 60 days of the given circumstance.

Credit denial - If you are denied credit or employment (or some other service or product you were seeking) as a result of something in your credit report, then the person who denied you has to tell you why and how to contact the credit bureau that provided the information.

Dispute inaccuracies - If you find that your report has inaccurate information, then you can dispute the information and the CRA has to reinvestigate it within 30 days. Until it is proven accurate, they cannot put the disputed information on the report unless they include your written statement of dispute along with it. If you prove that the information is inaccurate, then it has to be removed from the report permanently within 30 days. It is then the responsibility of the national CRA you are dealing with to inform the other national credit reporting agencies of the error.

Outdated information - In most cases, negative information stays on your report for seven years. Bankruptcy information stays on for 10 years.

Removing your name from marketing lists - You have the right have your name removed from lists that credit reporting agencies sell to marketers.

Seek damages - If someone accesses your report without "permissible purpose" or without your written permission, or violates one of the other specifications of the FCRA, then you can sue for damage

Fixing Errors on a Credit Report

What if your name is Bob Jones, and when you get your credit report from one of the credit bureaus you find that there are accounts listed there that are held by another Bob Jones? Or, you find that your unemployed and debt-heavy brother's information is showing up on your report? What do you do? Under the FCRA, you have the right to, and the CRA has the responsibility of, correcting any errors or incomplete information in your credit report.

Listed below are some steps you can take to correct errors on your report. Whatever you do, don't use one of those companies that say they can "fix" your credit history -- erase bankruptcies, liens, bad credit, etc. While there are some legitimate companies out there that can help you, you can do anything they can do.

One very important thing is to document everything you do (dates and times of phone calls, people you spoke with, what they said, what your action was, etc.), and keep copies of everything you send them. Don't send original documents -- send copies. Remember to be aggressive and persistent. This process may take a while -- usually three to six months.

Let the paperwork begin - You will begin a long and often arduous task of writing letters explaining the inaccuracies.

  1. First, send a letter to the CRA to give your side of the story and try to set straight the inaccuracies that have been reported. The letter should include your name and address and explain what is inaccurate and why. Tell them the facts and request a correction to your report. It would also help to include a copy of your report with the incorrect information circled, along with copies of any documentation that supports your claim. Send your letter by certified mail with a return receipt so you know it was received. Keep a record of everything you sent.
  2. Second, send a letter to the merchant or creditor who supplied the incorrect information to make it known that you are disputing it. Send copies of the documentation that supports your claim, just as you did with the CRA.

(NOTE: Most of the national credit bureaus allow you to begin the dispute process online. This isn't a bad place to start; but if you have additional documentation, presenting it the good old fashioned way is probably best.)

Give the CRA 30 days - The credit reporting agency legally has 30 days to investigate your claim (unless your claim is deemed "frivolous" or "irrelevant"). If after this amount of time you haven't heard back, call the customer service department. There is usually a toll-free number on the credit report that you can call for assistance. Remember to keep notes of your conversations and any actions that were taken as a result.

Re-reviewing your credit report - When you get a written response from the credit agency, you'll also get a new copy of your credit report (if there were any changes). If any information is changed on the report, the CRA cannot change it back unless the creditor provides proof that it was accurate. In this case, you will get notification from the CRA that the item has been put back on your report. You'll receive the contact information for the creditor or merchant so you can begin your battle (if you know you're right). Like we said at the beginning, be aggressive and persistent. Find out the creditor's side of the story. See below to find out what to do if they're right and you're wrong.

If you can't get any satisfaction and feel you're not being treated fairly by the creditor, you can contact the agency to which they report. Credit InfoCenter has a page that lists this contact information.

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