Credit Reporting Basics
There are well over 1,200 credit reporting agencies in the United States, but there are three in particular that every consumer should know: Experian, Equifax, and Trans Union. These are credit reporting agencies that collect credit history information on hundreds of millions of people. This information is provided to them by creditors and lenders, also known as subscribers in the credit bureau industry. Public information, including bankruptcies, judgments, and employment data are also collected by the credit bureaus.
Credit history information collected by the credit bureaus and compiled into a report are known as credit reports. These reports are then purchased by creditors or lenders to evaluate a consumer's creditworthiness when considering an extension of credit.
Among obvious information such as your name, social security number, address and birthdate, credit reports may also contain personal information regarding:
- your former and current employer (sometimes mentions position and income)
- your former and current addresses
- your spouse's name, social security number, employment information
- public information such as bankruptcies, judgments, or other legal actions
Three Major Credit Bureaus:
P.O. Box 740193
Atlanta, GA 30374
P.O. Box 2002
Allen, TX 75013-0036
P.O. Box 390
Springfield, PA 19604-0390
What is Credit Scoring?
Credit scoring is a system creditors use to help determine whether to give you credit. Information about you and your credit profile, such as your bill-paying history, the number and type of accounts you have, late payments, collections, outstanding debts, and the age of your accounts, is collected from your credit application and your credit report. Using a statistical program, creditors compare this information to the credit performance of consumers with similar profiles. A credit scoring system awards points for each factor that helps predict who is most likely to repay a debt. A total number of points (credit score) helps predict how creditworthy you are.
Creditors, especially mortgage lenders, can purchase FICO scores from the three major credit bureaus, develop their own customized models, or hire a company that specializes in developing FICO scores.
FICO was invented by the Fair Isaac COmpany, thus the name. They came up with the process of condensing all of your credit information into one three-digit number. This number is used to assess your overall credit. FICO scores range from 350 to 850. The higher your score is, the better your credit profile.
The Five Factors of FICO:
- Payment History (bankruptcies, late payments, collections, and judgements)
- Outstanding Debt (credit card balances, loans, etc.)
- Credit History (age of oldest reported account)
- Pursuit of New Credit (number of inquiries from potential lenders and newly opened credit accounts)
- Types of Credit (banks cards, department store cards, finance companies, etc.)
Your FICO score is used by creditors such as banks, finance companies, mortgage companies, credit unions, and utility companies for a faster, more accurate and objective evaluation when deciding to grant you a loan or credit. Each lender has a different way of interpreting a FICO score.
How frequently are credit scores updated?
Generally, credit bureaus update their consumer credit information once a month. However, credit scores are only generated at the time of request.
Is it possible to have varying credit scores on the same day?
This is possible in two different ways.
First, credit scores vary because each credit score (Beacon, Empirica, FICO) is generated by three separate credit bureaus meaning they each use their own unique scoring system.
Secondly, not all industries use the same scoring method. For instance, the credit scores generated by an auto loan application will usually differ from scores generated by a mortgage transaction or a credit card application.
"Hard" credit pull vs. "Soft" credit pull?
"Hard" pulls are inquiries which may have an effect on your credit rating. These types of credit pulls must be initiated or authorized by the consumer, or otherwise deemed illegal. Inquiries that occur during a 2 week period or timeframe are counted as a single inquiry; this applies to mortgage and auto loan applications. For credit card applications, a different rule applies, each pull is counted as an inquiry. So, it may be in your best interest to do all your shopping first, and when you're ready, apply to all the lenders at the same time. Transactions such as auto loans, mortgages, and credit card applications will create a "hard" pull. These inquiries will be reflected on your credit report, so your future creditors and lenders may be able to see them for up to 2 years.
"Soft" pulls are inquiries which do not have an effect on your credit rating. These types of inquiries are often initiated without your knowledge, but are deemed to be permissible by law. "Soft" pulls may include employee background checks, credit card pre-approvals, or your current creditor doing some homework on you. These inquiries do not show up on your credit report, so there are no harmful effects.
Negative Items Within in a Credit Report
Bankruptcy: A legal procedure for consumers who are not able to satisfy their debts. Next to a foreclosure, this is the most damaging item that can be reported on your file. Bankruptcies remain for 7 years for mortgage credit reports, but 10 years for bureau-level reports. A Chapter 7 usually does more harm to your credit score than a Chapter 13.
Charge-Off: An account deemed by a creditor to be an underperforming receivable that has been, for accounting purposes, converted to a loss recovery account. The consumer remains contractually liable for the unpaid balance and related charges. A charge-off is also known as a "Profit and Loss" (P&L) account, and usually reflected on the credit report as a R-9, I-9, or U-9.
Collection Account: An account in default of the contractual terms, and has been assigned to additional collection efforts by the creditor, or sold to a collection agency. Like a charge-off, a collection account is usually reflected on the credit report as a R-9, I-9, or U-9.
Foreclosure: A legal procedure in which a mortgaged property is sold by the trustee to pay the outstanding debt following default. The proceeds of the sale are applied to the mortgage debt. Foreclosures are also referred to as Sheriff's Sale or Court Sale.
Inquiries (excessive): Excessive inquiries may hurt your credit score, and also tell new lenders or creditors that you've been searching for new credit.
Judgement: The decision of a court of law. When recorded, the judgement becomes a lien on the property of the defendent. This type of account may stay on your credit report for up to seven years from the date of last reported activity.
Late Payments: Late payments for all accounts are reflected on your credit report as 30, 60, or 90 day lates.
Lien: A claim or right given to a creditor to secure payment of a debt. Liens that have been released stay on for 7 years, and accounts not paid may remain for at least 10 years.
Opt Out from Prescreened Credit Offers
If you're tired of receiving those pre-approved credit offers through the mail, you may opt out by filling out a form on this site: OptoutPrescreen.com. This website was created by the 3 major credit bureaus to give consumers the choice to opt out of those marketing mailing lists.