Understanding Credit Reports and Credit Score Ratings

Jun 27, 2010
Asa Ghaffar

Understanding Credit Reports - marydawn_md

An absence of errors and a good credit history are key to a good credit score. Understanding credit reports is fundamental to getting credit approval.

Understanding credit reports is a critically important lesson because this information not only affects an application for credit, it can also result in higher insurance costs or rule out certain career choices and rental properties. There are three credit reference agencies - Experian, Equifax and TransUnion. Each set of data is unique so it's important to check and verify the information held by each agency when looking for potential problems or inaccurate data.

Understanding Credit Reports

Individual information - social security number, date of birth, address, telephone number and employer. Past and present information is held about each person.
Public record information - mortgage foreclosures, bankruptcies, earnings attachments and defaults. Credit reference agencies hold this information for up to 10 years.
Credit report history - Comprehensive breakdown of active credit agreements (loans, mortgages, credit cards etc). Any payments made outside of the grace period, defaults, delinquent accounts will display for a period of 7 years. Chapter 7 bankruptcy will show for up to 10 years.
Credit searches - Each time a financial institution, insurance company or miscellaneous third party performs a credit search it will be recorded for 2 years.

How to Get a Free Credit Report and Score

The Fair and Accurate Credit Transactions Act specifically states that every U.S. citizen is entitled to a totally free credit report once every 12-months. The only company that the Federal Trade Commission (FTC) authorizes to provide this information is annualcreditreport.com. However, there is nothing in the legislation that states that they should receive a free credit report score. In order to find out a score, sign-up to a trial offer and cancel the agreement before it comes to an end.

Why Does a Credit Report Score Matter?

The algorithm used to calculate a score is incredibly complicated and remains a huge secret. It was designed to assess the likelihood of a debtor being able to keep-up with his or her repayments. The higher the score, the more reliable the potential customer. A high credit score is more likely to receive approval for a loan, but there are still bad credit mortgages available. The most common credit scoring system is the FICO credit score. It is made-up of the following:

Payment history - 35%
Amounts owed - 30%
Length of credit history - 15%
New credit - 10%
Types of used credit - 10%

Identifying and Disputing Credit Report History Errors

All credit reference agencies are required to investigate data disputes within a period of 30 days. The current legislation requires that the provider of the bad data, typically a lender, should correct the record. It is important to state why the information held is wrong, provide a copy of any relevant supporting information and send it via registered mail. Should any difficulties be experienced, a credit repair attorney may be able to help. The Fair Credit Reporting Act also gives each individual the right to add up to 100 words and this can be seen by a company that requests a credit report and score.