Identifying Information
Credit reports contain a certain amount of personal information. This is called identifying information and, among other things, allows the credit-reporting agency to distinguish between one Robert Smith from California and another Robert Smith from California. Typically, identifying information includes your name, address, Social Security number, previous addresses, employers (past and present), phone number, spouse, and date of birth. This information usually appears at the beginning or end of your report. If any of it is wrong, it should be corrected.
Under the Fair and Accurate Credit Transactions Act of 2003 (FACTA), you can request that the credit bureaus truncate your Social Security number on disclosures they send you, including your credit reports. This step may help prevent identity theft.
Account Information
Account information usually composes the largest part of a credit report. The lender's name, the account number, a description of the account, when it was opened, what the high balance was, what the outstanding balance is, the loan terms, your payment history, and the account's current status are typically included.
Under FACTA, when reporting information furnished by a medical provider, the credit bureaus can only include financial information on your credit report--they are prohibited from disclosing the identity of the medical provider or the nature of the services.
Public Record Information
Credit bureaus collect information from courthouse records and registries. Thus, you may find bankruptcies, tax liens, judgments, and even criminal proceedings listed in your credit file.
Credit Report Inquiries
Whenever someone requests a copy of your credit history, it is recorded as an inquiry in your report. Typically, these appear at the end of the report. They remain on your report for 24 months. These entries allow you to see who has been checking on you and whether unauthorized persons have obtained your credit file.
Occasionally, you will see an inquiry identified as being made pursuant to a prescreening program. Typically, this is a credit card company that has contacted the credit-reporting agency and asked for a list of consumers who meet certain credit criteria. The credit card company has yet to actually see your credit report, but they have received a list of names and addresses from the credit bureau with your name on it. Do not be alarmed. This only means that you will likely receive an offer in the mail for a preapproved credit card. You can ask to be taken off the solicitation list.
Under the Fair Credit Reporting Act (FCRA) and FACTA, you have the right to opt out of prescreen programs and block unwanted solicitations for a period of five years.
Consumer Statement
If you have requested that a consumer statement be included in your credit file, then an abbreviated version of your statement will appear on your report.
What does this information mean?
Each creditor uses its own credit evaluation standards. If you are looking at your credit report now, you may be trying to determine why you just got turned down for the loan you recently applied for. Alternatively, you may intend to apply for a loan and want to see how your credit looks. In either case, you have the report and can read the information, but you probably want to know what it means. You want to see whether you are creditworthy or not.
Each creditor has its own system. Some use credit scoring, and some don't. Some have severe credit standards, whereas others are more flexible. Some even make loans to consumers who have recently filed for bankruptcy. It is difficult to know what any creditor looks for or sees when they look at your credit report. Your credit-reporting agency does not even know. However, there are some general rules of thumb.
A history of late payments and bad debts means you are a high-risk borrower
The three major credit-reporting agencies provide information about payment performance over the last 12 to 24 months. Charge-offs and judgments up to seven years old may appear on your credit report. Generally, this is not good.
If you have a history of late payments and/or bad debts, it means you are a high credit risk. The lender figures that it will have to wait for its money, work hard to get its money, or not get its money at all. Therefore, the lender is unlikely to give you the benefit of the doubt or the loan.
Alternatively, the lender may offer you credit, but at terms less favorable than those offered to most of the consumers it serves.
Under FACTA, if you are extended credit, but because of your credit report, you were offered less favorable terms, you must be notified of that fact.
Too many inquiries mean you are shopping around too much
When you apply for credit, the lender will request a copy of your credit history. The lender's request appears as an inquiry on your report. More inquiries in a short period of time make loan officers nervous. They assume that you are shopping around for one of two reasons:
In the first case, you appear desperate, but the loan officer does not want to take a risk if none of the other banks in town will. In the second case, the loan officer sees someone who is on a credit spree, shopping for all the credit they can get. They may be financing a bad habit, borrowing to pay off another debt, or just foolish about the amount of credit they need. In any case, the loan officer is unlikely to take the risk by giving you a loan.
Under FACTA, the credit bureaus must notify you if too many inquiries are having a negative impact on your credit report.
A brief credit file means you have insufficient experience with credit
You may have good credit but not enough. Suppose you have five local department store charge cards with a credit limit of $500 on each. You have always paid as agreed, but the highest balance you have ever carried on any particular card is $100. You have had no other credit accounts. Now you are applying for a $16,000 loan to buy a car with only $1,000 down, but nothing on your credit report indicates you have the experience or ability to handle a $450 per month car payment for four years. Your lender knows that everyone must start somewhere, but it doesn't want to be at risk if you make mistakes. You need to build up more credit credentials before you are creditworthy enough to take on this kind of debt.
In these situations, the bank may lend you less money for a less expensive car, agree to lend you a lesser amount if you decide to put more money down or make you the loan if someone cosigns the loan with you.
Errors mean that the lender really cannot evaluate your credit history
Errors on your credit report are bad, even if they are not particularly derogatory when viewed in isolation. Loan officers often compare your loan application to your credit report. If inconsistencies exist, they may become suspicious. They may wonder if you are hiding something. Alternatively, they may become skeptical, assuming that if there is one error, there will likely be more. If there are more errors, there is no way to evaluate your application. Rather than take the time to call you up and sort it all out, a typical loan officer may reject the application and avoid the risk. If the errors indicate that you have bad credit, you are in even more of a pickle. If you see them, you should take action to correct the mistakes on your credit report. Contact your financial advisor with any questions - we are always happy to help!
Contributed by: Sandra Adams, CFP®
