Credit Reporting and Consumer Credit Scoring

by Paul N. Ellinger and Angela C. Lyons
University of Illinois at Urbana Champaign

Introduction

Credit reports and scores are being used for many decisions such as credit determination and pricing; insurance pricing; government licenses; and employment.   It is important for you to check your reports to identify errors and detect fraud. It is also important to check your report to become an informed consumer of information being used to make decisions about you. Low credit scores can result in credit denial, high interest rates on consumer and agricultural loans, high premiums on auto and home insurance and delays in credit approval.

Frequently Asked Questions (FAQ)

v     Credit Reports

  1. What is a credit reporting agency?
  2. What is included on a credit report?
  3. How can I get access to my credit report?
  4. Who can access my credit report and under what conditions can a credit report be used?
  5. How often should I check my credit report?
  6. Are all of the credit reports from each of the 3 national credit reporting agencies the same?
  7. Who is responsible for identifying and correcting errors on your credit report?
  8. What can I do if I find incorrect information in my credit report?
  9. How long is credit information kept at the credit reporting agencies?

v     Credit Score

  1. What is a credit score and how does it differ from a credit report?
  2. Does everyone have a credit score?
  3. What are the major factors that go into a credit score?
  4. What information is NOT used to calculate a credit score?
  5. Is my credit score related to my overall wealth position?
  6. What is the range of potential credit scores?
  7. What is a “good” credit score?
  8. How can I get access to my credit score?
  9. Will the scores from each of the credit reporting agencies be the same?
  10. How often is my credit score updated?
  11. What is the difference between a credit score and an insurance score?

v     Building Good Credit

  1. What is a credit inquiry?
  2. How do inquiries impact my credit score?
  3. Will ordering a copy of my credit report cause my credit score to drop?
  4. Will my score drop if I am shopping around for the best interest rate?
  5. Will my spouse have the same credit report and score as me?
  6. Can I improve my credit score by closing old credit cards?
  7. Will co-signing or applying jointly for a credit application impact my credit report and score?
  8. Will my score impact my interest rate on my loan?
  9. Is it true that my credit information can impact premiums for auto and home insurance?

v  Protecting Your Credit

  1. What is identity theft?
  2. What can I do to protect myself from identity theft?
  3. What do I do if I am a victim of identity theft?
  4. How can I request a copy of my child’s credit report to make sure she/he has not been a victim of identity theft?
  5. How do I identify fraudulent e-mails?
  6. What is “phishing”?
  7. What is a credit repair service? 
  8. What do I need to know about credit repair scams?
  9. Where can I go to find information on the latest scams in my area?

v   Consumer Rights and Responsibilities

  1. What rights do I have if a lender has rejected my application based on my credit report
    and score?
  2. What rights do I have if an insurance agent rejected my policy based on information from
    a credit report?
  3. Are lenders required to report information to a credit reporting agency?
  4. What is the Fair Credit Reporting Act (FCRA), and what does it mean for you?  
  5. What is the Truth in Lending Act?
  6. What is the Fair Debt Collection Practices Act?
  7. Where can I go to find more information on my rights and responsibilities as a consumer?

v     Issues in Agricultural and Small Business Lending

  1. Does a lender use a credit report and score for my agricultural or small business loan?

1. What is a credit reporting agency?

A credit reporting agency (CRA) is a clearinghouse for consumer credit
history information. A CRA is not a government entity. Credit and information
providers give the CRA information on how their customers pay their bills. The
CRA assembles the information along with public information into a customer-
specific file. The credit and information providers can access credit reports
and receive information about consumers

The three major credit reporting agencies are

- TransUnion (http://www.transunion.com/) 1-800-888-4213
- Equifax (http://www.equifax.com/) 1-800-685-1111
- Experian (http://www.experian.com/) 1-888-397-3742


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2. What is included on a credit report?
 
The information stored in the credit files consist of four major components: (1) personal information -- current and past addresses, phone numbers, employers, and date of birth; (2) credit information and payment history for all consumer credit accounts like auto financing, installment loans, department cards, credit cards, and home mortgages; (3) public information on bankruptcy filings, tax liens, foreclosures, wage attachments, etc.; and (4) a list of firms that have accessed your credit report in the past two years. 

Items that are NOT included in the credit files are information and balances on deposit accounts, salary or wage levels, income taxes, land and machinery values, and medical records.  Your race, color, religion, national origin, and marital status are NOT included. Moreover, information on agricultural or business loans is typically not reported.

View sample Experian Credit Report

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3. How can I get access to my credit report?

Since credit data are being used frequently, new regulations have passed that allow easier access to your information. 

All residents can access free credit reports through a central web site http://www.annualcreditreport.com/ ,

a toll free number 877-322-8228 (877-FACT ACT),


or a written request sent to
Annual Credit Report Request Service
P.O. Box 105281
Atlanta, GA 30348-5281. 

You are entitled to one free report annually from each of the three major credit reporting agencies. 

Be careful since many imposter web sites have been reported. 

You can also purchase your credit report at the three major credit reporting agencies:
The three major credit reporting agencies are

- TransUnion (http://www.transunion.com/)
- Equifax (http://www.equifax.com/)
- Experian (http://www.experian.com/)

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4. Who can access my credit report and under what conditions can a credit report be used?
Under the Fair Credit Reporting Act (FCRA), a credit report may be obtained only under the following conditions:

    • Authorization of the consumer in writing
    • A “legitimate” business need in connection with a business transaction initiated by a consumer
    • A consumer applies for credit
    • Reviewing or collection of a consumer's account
    • Prescreening offers of credit
    • Employment purposes, including hiring and promotion decisions, when the consumer has given written permission
    • Underwriting insurance when a consumer has applied
    • Investor or securities firms where a consumer has applied that could result in a margin or credit obligation
    • For use by state and local officials in connection with determination of child support payments
    • A government license or other benefit when the law requires consideration of the consumer's financial responsibility
    • By a court order or federal grand jury subpoena

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5. How often should I check my credit report?

You should check your report at least one time per year. Moreover, it might be advisable to know your credit history prior to applying for credit.

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6. Are all of the credit reports from each of the 3 national credit reporting agencies the same?

The credit reports may differ across the 3 credit reporting agencies (CRA).  Some institutions and information providers only report information to one of the three credit reporting agencies; thus, the information may not be the same across all of the reports.

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7. Who is responsible for identifying and correcting errors on your credit report?

You are responsible for identifying and initiating the dispute process with a credit reporting agency even when the error is clearly not your fault. It is good business practice to check your credit report periodically for accuracy and correct items that are erroneous.

Additional information on disputing an item

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8. What can I do if I find incorrect information in my credit report?

You must file a dispute with the major credit reporting agency (CRA) that has the incorrect information.  You must file a dispute with the CRA including your complete name, address and the facts regarding the dispute or errors.  Each of the three major credit reporting agencies has the capability to receive disputes online or by letter. You should make copies (NOT originals) of the materials in question and send your letter and accompanying materials by certified mail.

The CRAs will investigate the dispute and usually respond within 30 days.

The CRA is obliged to correct erroneous information and the institution that supplied the erroneous information must notify all nationwide CRAs so they will correct the information as well.

If you request, the CRA must also send notices to anyone who received your report in the past 6 months. If used for employment purposes, the corrected report can be sent to anyone receiving the report over the past 2 years.


Additional information on disputing an item

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9. How long is credit information kept at the credit reporting agencies?
In general, the negative information will be kept for 10 years.

Specifically,

 

Closed or inactive accounts    

10 years

 

Derogatory accounts

7 years

 

Public records   

7 years

 

Bankruptcies (Chapter 7, 11, and 12)

10 years

 

Chapter 13 bankruptcy

10 years

 

Unpaid tax liens

15 years


Other negative items may be reported indefinitely for loans and insurance policies in excess of $50,000.

Positive payment information may stay indefinitely in your account.


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10. What is a credit score and how does it differ from a credit report?

A credit score is a mathematical calculation based on items included in the credit report such as account payment history, account balances, inquiries, and the length of history. It is designed to predict how likely a borrower will become delinquent.

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11. Does everyone have a credit score?

No, some consumers do not have enough information to generate an accurate score. Consumers with limited history may not have a score.

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12. What are the major factors that go into a credit score?

Many factors go into the complex and proprietary algorithms for consumer scores. In general, the categories of factors and weights are:

A. Payment History - Were payments made on time?
Approximate weight = 35%

Some of the variables used include

    • Payment information on each account
    • Public record information on collections
    • Details on late or missed payments
    • Number of accounts with late payments

B. Amounts Owed – How much is too much?
Approximate weight = 30%

Some of the variables used include:

  • The amount owed on all accounts
  • The amount owed on different types of accounts (credit card, installment, mortgage)
  • A balance shown on certain types of accounts (example: balances on installment loans in good standing indicates responsible borrowing)
  • The number of accounts with positive balances
  • How much (proportion of total) of the total credit lines are being used
  • How much is still owed on installment loans vs. original balances


C. Length of Credit History – How established is the customer?
Approximate weight = 15%

Some of the variables used include:

  • Age of oldest account
  • Average age of all accounts
  • How long specific accounts have been established
  • How long has it been since the accounts have been used

D. New Credit – Is the customer taking on new debt?
Approximate weight  = 10%

Some of the variables used include:

  • The number of new accounts
  • The length of time since the most recent time an account has been established
  • The number of inquiries for credit that have been made and reported
  • The length of time since credit report inquiries were last made

E. Types of Credit -  Does the customer have the right mix?
Approximate weight  = 10%

Some of the variables used include:

  • proportion and use of different types of credit
    • credit card
    • installment loans
    • mortgage loans

Source: Equifax

Tips on improving your score in each of these areas.

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13. What information is NOT used to calculate the credit score?

Information not included in the credit score:

  • Wage or salary information
  • Real estate owned
  • Machinery and equipment owned
  • Deposit or Savings account information
  • Medical histories
  • Loans from individuals (parents, friends, etc.)
  • Business loans
  • Race, gender or national origin


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14. Is my credit score related to my overall wealth position?

There is no explicit relationship between your wealth position and your consumer credit score. No asset information is available to the credit reporting agencies. Information like money in savings accounts, stocks, bonds, autos, machinery, land, and buildings are not used to calculate the scor
e.

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15. What is the range of potential credit scores?

The range of scores is between 300 and 850. The majority of consumers have scores between 600 and 800.  A score of 700-720 typically gets you a loan with preferable rates.

Fair Isaac Reports the following distribution of scores and delinquency rates:
 



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16. What is considered a "good" credit score?

In general, a score of 700 is considered a healthy score and usually a score of 660 is considered the threshold for conventional mortgages.

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17. How can I get access to my credit score?

Your credit score can be purchased for an additional fee at the time you access your free credit report. The fee ranges from $5 to 7.
This is a wise investment since you are also given the factors that are most important to improving your specific score.

You can also purchase your score at any time through each of the three major credit reporting agencies:

Free Credit Score Range Estimator

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18. Will the scores from each of the credit reporting agencies be the same?

The credit scores may differ across the 3 credit reporting agencies (CRA).  Some institutions and information providers report information to only one of the three CRAs; thus, the information used in the algorithms may not be the same across all of the reports.

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19. How often is my credit score updated?

The credit scores are updated as the data are accessed. Since the scores are based on credit report the frequency of updates are based on the timing of credit report updates. The credit reports are typically updated monthly.

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20. What is the difference between a credit score and an insurance score?

Insurance scores are based on a credit score and combined with other factors like driving records and previous claims.

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21. What is a credit inquiry?
A credit inquiry is an item on the credit report that reports a legitimate request from a company to view your credit report.

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22. How do inquiries impact my credit score?
Credit inquiries based on credit applications negatively impact the credit score.

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23. Will ordering a copy of my credit report cause my credit score to drop?
Credit inquiries based on ordering your own credit report will not affect your credit score.

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24. Will my score drop if I am shopping around for the best interest rate?
Your score will drop if an application for a loan is completed and the institution requests a copy of your credit report.

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25. Will my spouse have the same credit report and score as me?
Credit reports are unique to an individual.  Your spouse will not likely have the same credit report or score.  Credit accounts and obligations with joint ownership will appear on both reports. 

Divorce does not change the joint credit ownership of accounts that was established.

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26. Can I improve my credit score by closing old credit card?

This myth is not true.  In fact, it could potentially hurt your score if it is an account that establishes a long history of responsible payments. Moreover, closing an account will not make any negative information on that account go away. Closing inactive accounts that do not have a long history is more advisable.

Closing inactive accounts also reduces your overall borrowing capacity and potentially increases your utilization rate (proportion of available credit borrowed).

Myths and fallacies of credit reporting


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27. Will co-signing or applying jointly for a credit application impact my credit report and score?

When you co-sign or apply jointly for a credit application, you have ultimate responsibility for the account including monthly payments. If timely payments are not made on these accounts, your credit score will likely decrease.

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28. Will my score impact my interest rate on my loan?
Many lenders, especially mortgage and auto lenders, are now using credit scores to determine the interest rate to charge on a loan. For example, the range in interest rates on recent 60-month auto loans were from less than 5% for the strongest credit to almost 18% for the highest risks based on FICO score.

Calculator: interest rates charged on loans by credit score.

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29. Is it true that my credit information can impact premiums for auto and home insurance?

Auto and home insurers are now incorporating consumer credit information into their underwriting and insurance pricing criteria.  According to the Insurance Information Institute, over 90% of insurance companies utilize credit data in underwriting insurance.  The rationale is simply there is a statistical relationship between an individual's credit score and insurance losses. Credit data can also be used for employment purposes, certain licenses, leases, and other legitimate reasons outlined in the Fair Credit Reporting Act.

Other information about insurance and credit reporting.

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30. What is identity theft?
It is someone using your personal identification without your consent or knowledge to commit a fraudulent crime.

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31. What can I do to protect myself from identity theft?
Be careful with all financial documents and items that make reference to your financial and personal identification information. Do not voluntarily give personal or financial information over the phone, through e-mail or on the internet. Destroy or shred information that you throw away.

Know what is in your wallet or purse. In case of theft, you would know who to call.

Be careful with your personal identification numbers (PIN) and where you store them.

Don't send private information in e-mails.

Identity Fraud Safety Quiz, http://www.bbbonline.org/idtheft/safetyQuiz/


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32. What do I do if I am a victim of identity theft?

Contact all of the credit card companies and financial institutions where your identity has been compromised.

Contact your state driver's license office.

Contact all of the three national credit reporting agencies and instruct them you have been a victim of identity theft. Follow their instructions on how to proceed.

The three major credit reporting agencies are

- TransUnion (http://www.transunion.com/) 1-800-888-4213
- Equifax (http://www.equifax.com/) 1-800-685-1111
- Experian (http://www.experian.com/) 1-888-397-3742

Contact Social Security Administration SSA Fraud Hotline: 800-269-0271, http://www.ssa.gov/pubs/idtheft.htm if your social security number has been stolen.

Contact ID Theft Clearinghouse 1-877-ID-THEFT (1-877-438-4338) http://www.idtheftcenter.org

File a police report and a complaint with the Federal Trade Commission.


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33. How can I request a copy of my child's credit report to make sure she/he has not been a victim of identity theft?

You need to send additional information to verify your relationship to the child. This typically includes

  • A copy of the parent's drivers license
  • Proof of parent's address
  • A copy of the child's birth certificate
  • A copy of the child's social security number
  • The child's full name
  • The child's date of birth
  • Previous addresses for the last five years, if appropriate

For additional information on reporting an identity theft for a child

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34. How do I identify fraudulent e-mails?

This has been becoming more difficult since criminals are becoming more sophisticated. Usually the e-mail requests you directly reply to an e-mail or select a link that takes you directly to a web site. In most cases, they will ask you for financial information or personal identification numbers (PIN). The messages will often have an urgent or threatening tone and request you perform immediate action. Most financial institutions will not request or provide personal information in e-mails or pop-up boxes. Never open attachments of suspicious e-mails.

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35. What is “phishing”?

It is the act of sending an e-mail claiming to be an institution in an attempt to scam you into giving financial and personal information that ultimately would be used for identity theft. The user is often asked to go to a "bogus" web site and provide updated information, passwords, PIN numbers, etc. However, the web site is not legitimate. It is a good practice not to click on any links within the text of a suspicious e-mail.

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36. What is a credit repair service?

Credit repair services assist consumers in identifying and reporting outdated and erroneous items on your credit report. The legitimate services are typically counseling services that provide assistance in budgeting, prioritization of bill payments or negotiation with a creditor. Professional bill payment services will offer assistance in managing the level of payments to provide each billing entity in order to avoid excess fees. Be wary of credit repair services that promise quick fixes and can immediately reduce your debt. These are often credit repair scams and usually involve up front fees that cannot be recovered.

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37. What do I need to know about credit repair scams?

There are no quick fixes to an actual derogatory item on the credit report. Only time can resolve problems resulting from derogatory items on a credit report. There are numerous techniques used by these companies, some that even appear to work in the short-term. However, these scams are short lived and it is advisable to avoid credit repair companies.

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38. Where can I go to find information on the latest scams in my area?

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39. What rights do I have if a lender has rejected my application based on my credit report
and score?


If your application is denied, you have the right to the name, address and phone number of the consumer reporting agency used by the lender (Fair Credit Reporting Act)

You also have a right to a free credit report if an lender has denied your application.

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40.   What rights do I have if an insurance agent rejected my policy based on information from a credit report?

If your application is denied, you have the right to the name, address, and phone number of the consumer reporting agency used by the insurance agency. (Fair Credit Reporting Act).

You also have a right to a free credit report if an insurance agency has denied your application.

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41. Are lenders required to report information to a credit reporting agency?

Lenders are not obliged to report positive or negative information to a credit reporting agency.

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42. What is the Fair Credit Reporting Act (FCRA), and what does it mean for you?        
The Act promotes the accuracy, fairness, and privacy of information for the credit reporting agencies.


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43. What is the Truth in Lending Act?
The Act protects consumers by requiring complete and clear disclosure of key terms and costs of consumer loans.

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44. What is the Fair Debt Collection Practices Act?
The Act requires debt collectors treat you fairly in debt collection methods.


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45. Where can I go to find more information on my rights and responsibilities as a consumer?


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46. Does a lender use a credit report and score for my agricultural or small business loan?

Many agricultural and small business lenders access your credit report and score. Most acquire the information to validate the level of credit balances and recent payment history. A positive credit report is an indication of good character, strong conduct, and a disciplined use of credit.  Lenders view this as a signal of good managerial characteristics that are likely to be transferred to the agricultural or small business.

It is becoming more common for some lenders to use the consumer credit score as one of the key evaluation and pricing criterion for an agricultural or small business loan.

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A Checklist of Important Resources

ü       To obtain a free copy of your credit report go to:  www.annualcreditreport.com.

ü       To learn more about your credit report and credit score visit:

Fair Isaac Company

www.myfico.com

Understanding Your Credit Score

http://www.myfico.com/Offers/myFICO_UYCS%20booklet.pdf

FICO Credit Score Estimator

www.myfico.com/ficocreditscoreestimator

FICO Score Simulator

http://www.myfico.com/Content/Samples/Sample_ScoreSimulator.asp?ReportID=1&fire=15

FTC Credit Report Publications for Consumers

http://www.ftc.gov/bcp/conline/edcams/credit/coninfo_reports.htm

Getting Credit: What You Need to Know About Your Credit

http://www.ftc.gov/gettingcredit/

http://www.ftc.gov/bcp/conline/pubs/credit/gettingcredit.pdf

Building a Better Credit Record

http://www.ftc.gov/bcp/conline/pubs/credit/bbcr.htm

http://www.ftc.gov/bcp/conline/pubs/credit/bbcr.pdf

ü       To better understand how your credit information affects your insurance score go to:

Insurance and credit reporting: Insurance Information Institute

http://www.iii.org/media/hottopics/insurance/creditscoring/

ü       To contact the 3 National Credit Reporting Agencies visit:

Equifax (www.equifax.com) 1-800-685-1111
Experian (www.experian.com) 1-888-397-3742
TransUnion (www.transunion.com) 1-800-888-4213

ü      To learn how to minimize your risk and recover from identity theft go to:

Federal Trade Commission’s ID Theft homepage:
www.consumer.gov/idtheft
1-877-ID-THEFT (1-877-438-4338)

ID Theft: What’s It All About?

http://www.ftc.gov/bcp/conline/pubs/credit/idtheftmini.pdf

Taking Charge: Fighting Back Against Identity Theft

http://www.ftc.gov/bcp/conline/pubs/credit/idtheft.htm

ü       To find additional information on your rights and responsibilities as a consumer visit:

Office of the Illinois Attorney General http://www.illinoisattorneygeneral.gov/consumers/index.html

Federal Trade Commission

www.ftc.gov/credit