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Credit Reporting and Scores

Credit/FICO scores

Your credit score is a three-digit number calculated by credit reporting agencies who look at information like your past credit payment history to determine how likely you are to pay your bills in the future. While many agencies exist, the three major ones are Equifax, Experian, and Trans Union. Each credit reporting agency calculates its score differently, so your scores from the three major agencies may vary slightly. The higher your score, the better credit risk you are.

How to find out your score

You’re entitled to a free copy of your credit report every year from each of the three major credit reporting agencies. The only place you can get a free copy of all three is at https://www.annualcreditreport.com/. Other websites may look like they will give you the reports for free, but often you’ll find hidden fees associated with using the company.

Unfortunately, your free annual credit reports do NOT include your credit score. In order to get your credit score, you will have to pay each of the credit reporting companies a fee for them to send your score to you. You can do that by contacting EquifaxExperian, and Trans Union directly.

How scores are calculated

The most well-known scoring system used is the Fair, Isaac, and Company (FICO) score, which looks at the following information when determining your score:

  • Your payment history. This is how well you pay at least the minimum balance on your credit cards, outstanding loans, retail accounts, etc.

  • How much of your available credit you’ve used. This is how close you are to your credit card limits, how much you’ve paid down your installment loans, etc.

  • Length of credit history. This is the average age of all of your credit accounts as well as the age of the oldest account

  • Type of credit you have. This looks at the different types of credit you have including mortgage, consumer finance, installment loans, and revolving lines of credit.

  • New credit inquiries. This is how many times companies have looked at your credit report to determine if you’re a good credit risk. This only includes “hard” credit inquiries where you’ve applied for a new credit card or loan, not the “soft” credit inquiries of companies who are prescreening you to potentially offer you a credit card, insurance policy, etc.

Each credit reporting company assigns different weights to these categories, so your score may vary from company to company. However, the scores range from 300-850, with 850 being the best score you can have, and your rate will probably not vary significantly between the companies.

How scores are used

Traditionally, credit scores have been used by potential lenders such as banks or credit card companies to determine how likely you are to repay the money you borrow from them. Lenders will purchase your credit report from one or more of the credit reporting companies and use not only your score but your ranking on each category to determine if you’re a good risk. The better your report, the more likely you are to get a lower interest rate for your loans.

More recently, insurance companies and employers have also been purchasing credit reports. Studies have shown that people with higher credit scores are better insurance risks, so having a high score can help lower your auto and homeowner insurance. Also, some employers feel that looking at your credit report helps them determine if you’ll be a dependable employee, so they use that as part of their hiring process. It’s important to note that potential employers do not receive your credit score, just your credit report, and they can only access this information if you give them permission. While all states allow the use of credit reports for employee screening, some states have limited their use.

How to raise your credit score

While there’s no quick fix to improving your credit score, consistently following the steps below will eventually raise your score:

  • Pay your bills on time. Make sure you make at least the minimum payment on every bill you have every month. Paying your bill off in full every month is even more effective in raising your score.

  • Don’t max out your credit limit. Part of your score is determined by the ratio of how much you owe to how much you could owe based on your credit card limits, revolving line of credit limits, etc. Try to use no more than 30% of your potential limit.

  • Don’t apply for a lot of credit cards. Since credit reporting companies look at the number of “hard” hits on your account when determining your score, applying for several store credit cards is not a good idea. Get two cards, use one of them as your primary and one as your back up, and pay off your balance each month. However, if you have more than two cards, don’t cancel them all at once and transfer the balance to another card, since doing so will show that you’re using up more of your credit limit.

  • Have a long credit history. Keep the same credit accounts for a long time to demonstrate your dependability.

  • Check your credit report regularly. Make sure you get your free copy of your credit report each year. Examine it closely to make sure that all of the information is correct.

  • Do NOT hire a company to help you raise your score. These companies cannot do anything for you that you can’t do for yourself, and they often charge a large fee to help you.

Credit Reporting Agencies

Credit reporting agencies (also called credit bureaus) collect information about your credit history from banks, credit card companies, mortgage companies, and other creditors. Using this information, they determine your credit score, a three-digit number that indicates how likely you are to repay your debts. While many credit reporting agencies exist, the three major agencies are Equifax, Experian, and Trans Union. Their contact information is below.

Equifax 
P.O. Box 740241
Atlanta, GA 30374-0241
1-800-685-1111

Experian 
P.O. Box 2104
Allen, TX 75013-0949
1-888-EXPERIAN (397-3742)

Trans Union 
P.O. Box 1000
Chester, PA 19022
1-800-916-8800

Credit Reporting Laws

The Federal Fair Credit Reporting Act (FCRA) is the primary law that deals with how companies gather and use consumer credit information and what rights consumers have regarding that information. While the law is quite long, the FTC has prepared a three-page summary of your rights as a consumer. The information below is an overview of your rights:

  • You must be told if information in your file has been used against you.

  • You have the right to know what is in your file.

  • You have the right to ask for a credit score (though there may be a charge for it).

  • You have the right to dispute incomplete or inaccurate information.

  • Consumer reporting agencies must correct or delete inaccurate, incomplete, or unverifiable information.

  • Consumer reporting agencies may not report outdated negative information.

  • Access to your file is limited.

  • You must give your consent for reports to be provided to employers.

  • You may limit “prescreened” offers of credit and insurance you get based on information in your credit report.

  • You may seek damages from violators.

  • Identity theft victims and active duty military personnel have additional rights.

For more information, visit www.ftc.gov/credit