2.6.1.

F1

CreditReportsandScores
AdvancedLevel

TheImportanceofaCreditHistoryforObtainingCredit
Creditreferstoborrowing.Youhaveusedcreditifyoureceivemoney,goods,orservicesinexchangeforyour
promisetopaybackadefinitesumofmoneyatafuturedate.Forexample,ifyoureceivealoantopayfor
highereduca onexpenses,youareusingcredit.
Whenalendergrantscredittoaborrower,thelendertruststheborrowertorepaywhatwasborrowed.To
helpdeterminewhetherornottogranttheborrowercredit(aswellasdeterminethetermsofcreditoered),a
lenderwillo enexaminetheborrowerscredithistory.Acredithistoryisarecordoftheborrowerspastloans
andcreditrelatedtransac ons.Yourcredithistoryispresentedinyourcreditreport,therecordofyouruseof
credit.

CreditReportsandCreditRepor ngAgencies
Creditrepor ngagencies(some mescalledcreditbureaus)createcreditreportsbasedontheinforma onthey
receivefromlendersregardingyouraccounthistorywiththatlender.Credit reporng agencies do not decide
whether or not to grant you credit; the agencies only collect credit history informaon.
Therearethreecreditrepor ngagenciesintheUnitedStates:Equifax,Experian,andTransUnion.Therefore,you
mayhavethreecreditreports(onefromeachcreditrepor ngagency).Becauselenderschoosewhat
informa ontoreportandtowhichcreditrepor ngagency(ies)thatinforma onisshared,yourcreditreport
mayvaryacrossthethreena onalcreditrepor ngagencies.Ifyouhaveneverusedcredit,orithasneverbeen
reportedforyou,thenyouwillnothaveacreditreport.

Creditreportinforma onisdividedintofourcategories:
onThisis
1.Consumer(personal)informa
informa onyouhaveprovidedtolenders

2.

whenapplyingforcredit.Itincludesyour
name,currentandpreviousaddresses,
telephonenumber,fullorpar alSocial
Securitynumber,dateofbirthandcurrentand
previousemploymentinforma on.
Creditaccountinforma onThelargest
sec onofmostcreditreportscontainsspecific
informa onabouteachofyourcredit
accounts.

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2.6.1.F1

Creditaccountinforma onmayinclude:

Typeofcredittherearetwomaintypesofcreditonyourcreditreport:closedendcreditandopenend
credit.
Closedendcredit
(alsoknownasinstallmentcredit)isaloanthatyou
mustrepayinaspecifiednumberofequalmonthly
payments.Examplesofclosedendcreditinclude
automobileloans,mortgages,andeduca onloans.
Closedendcreditusuallyhasanagreement
(contract)thatmustbesignedoutliningthe
repaymenttermssuchastheamountofthe
payment,thenumberofpaymentsthatwillbe
madeandtheinterestrate.

Openendcredit
(alsoknownasrevolvingcredit)isextendedasaline
ofcreditestablishedinadvancesoyoudonothave
toapplyforcrediteach menewcreditisdesired.
Creditcardsareatypeofopenendcredit.Aunique
featureofopenendcreditisthatyoucanpaythe
loanbalanceinasinglepaymentoraseriesofequal
orunequalpayments,usuallymonthly.Youchoose
howmuchtopayeachmonth.However,thelender
typicallyrequiresaspecifiedminimummonthly
payment.

LoanamountorcreditlimitForclosedendloansyourcreditreportwillindicatetheoriginalloanamount.
Openendcreditwillindicateacreditlimit,whichisthemaximumdollaramountthatcanbeborrowed.If
creditlimitisnotavailable,thereportmayindicatethehighestbalanceeverontheaccount.

DateInforma

onforeachaccountwillshowthedatestheaccountwasopened,closedandlastreported.

AccountbalanceTheaccountbalanceshowstheremainingamountyouowethelender.

Paymentinforma

onForeachaccount,yourcreditreportpresentsthesizeofyourmonthlypayment,
whetherthepaymentislate(andbyhowmuch)andyourpaymenthistoryontheaccountincludingthe
numberoflatepaymentsover me.

onThissec onofthecredit
3. Publicrecordinforma
reportpresentsinforma onfromfederal,state,and
countypubliccourtrecords.Thismayincludecredit
accountsthathavebeenturnedovertocollec on
agencies,whicharebusinesseshiredbylendersto
pursuepaymentsondebtsthatborrowershavenot
paidbackaccordingtothetermsofthecredit
contract.Ifyouhavefiledforbankruptcy,ifyou
haveanytaxliens(whentaxesarenotpaidinfull),
andanyhistoryofforeclosures(whenaborrower
failstokeepupwithmortgagepaymentsandthe
lendertakespossessionoftheproperty)this
informa onwillalsoappearinacreditreport.
Inquiryinforma onAninquiryoccurswhen
4. someonewithpermissiblepurposerequestsacopy

Inorderforacreditrepor ngagencyto
provideapersonorbusinesswithyourcredit
reportitislawthattheperson/businessmust
haveapermissiblepurpose.Permissible
purposestoreceiveyourcreditreportinclude:
Openormanagecreditaccounts
Provideoersforcredit
Underwriteinsurance
Abusinesstransac onini atedbythe
consumer
Courtorderorfederaljurysubpoena
Valua onofriskofaninvestor
Eligibilityforgovernmentlicense
Disclosuretoconsumer
Employmentpurposes

ofyourcreditreport.Creditrepor ngagencies
recordallinquiriesreceivedinthepriortwoyears.
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2.6.1.F1

Thespecificinforma onincludedforeachaccountonyourcreditreportwilldependuponthetypeofaccount.
Lenderssuchasdepository
ins tu ons,creditcard
companies,retailstores
thatoercredit,and
mortgage/finance
companiesusuallyreportall
informa on,posi veand
nega ve,tocreditrepor ng
agencies.

Datafurnisherssuchaslandlords,cellphonecompanies,u litycompanies
(electricity,gas,water),andmedicalprovidersmostlikelyonlyreportwhen
theconsumerhasnotpaidthemoneyowedtothem.Forexample,ifyouare
latepayingyourcellphonebill,thecellphonecompanymayreportthat
informa ontocreditrepor ngagencies.Medicalprovidersmayreportlate
medicalpaymentbutmaynotreportnonfinancialmedicalinforma on,such
aswhatwastreatedorthetreatmentfacility.Increasingly,creditrepor ng
agenciesareencouragingandcompilingregularpaymentinforma onfrom
noncreditorssuchasapartmentsandu li esasawaytohelpconsumers
buildaposi vecredithistory.

Race,religion,gender,andna onalitymaynotbeincludedonacreditreport.Inaddi on,creditrepor ng

agenciesdonotrecordinforma onregardingnoncreditdepositoryins tu onaccountinforma on(suchas
checkingandsavingsaccounts),criminalbackgrounds,orbuyinghabits.
Always
Accountsin
good
standing

Your Present Self

Impacts Your Future Self

Timeistheonlywayto
removepoten allynega ve
informa onfromyourcredit
report.Informa onremainson
yourcreditreportforaspecific
amountof medependingon
thetypeofinforma on.

2years
Inquiries

Someitems
remainon
yourcredit
reportlonger
thanothers

7years
Publicrecord
informa on

10years
Closed
accountsin
good
standing

7years
Lateor
missed
payments

Doyouusecredit?Ifso,whattypes?

CreditScores
Acreditscoreisanumericalsummaryofyourcredithistorythatindicatesyourcreditworthiness,orlikelihood
ofrepayingaloanasagreed.Basically,acreditscoreisanumericgradeofapersonscreditworthiness.
Creditscoresenablelenderstomakemoreobjec veandconsistentlendingdecisionsquicklyandfairly.
Therearedierenttypesofcreditscores,eachcalculateddierently.Themostcommoncreditscoresavailable
toconsumersareproducedbycreditrepor ngagenciesandcompaniessuchasFairIsaac,Corp(FICO)and
VantageScore.
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2.6.1.F1

FICOscoresandVantageScoresarecalculatedusingonlyinforma onfromyourcreditreportincluding(but
notlimitedto)itemssuchas:

thenumberofcreditaccountsyouhave
thetypeofcreditaccountsyouhave(closedendversusopenend)
whetheryoupayyourbillson

me

howmuchofyouravailablecredityouarecurrentlyusingthisisusuallyforopenend
creditwheretheamountowediscomparedtothecreditlimit

whetheracollec

onagencyistryingtocollectdebtfromyouforalender

thetotalamountofmoneyyoucurrentlyowetoalllenders
howlongyouhavehadcurrentcreditaccounts
whetheryouhaveapriorbankruptcy,foreclosureorothercreditrelatedpublicrecorditemsinyour
creditreport
BecauseFICOscoresandVantageScoresarecalculatedonlyfromtheinforma oninacreditreport,any
informa onnotallowedinyourcreditreportisnotusedtocalculateyourcreditscore.So,itemssuchas
race,religion,age,salary,occupa on,employmenthistory,whereyoulive,interestratesoncurrentcredit
accounts,andnetwortharenotusedtocalculateyourcreditscore.However,althoughthisinforma onis
notincludedinacreditscore,eachoftheseitems(withtheexcep onsofraceandreligion)mays llbe
consideredwhenalenderreviewsacreditapplica on.
Eachcreditscoringmodelhasitsownrangeofscores.Creditscorestypicallyrangebetween300and990.
Higherscoresrepresentagreaterchanceoftheconsumerrepayingaloan.Eachcreditscoringmethodhasits
ownscalethathelpsalenderevaluatetheprobabilitythatyouwillrepaytheloan.Forexample,theFICO
creditscorerangesbetween300and850,andtheVantageScorecreditscorerangesfrom501990.Forboth
ofthesescoringmodels,yourscorewillbedisplayedalongwithhowyourankrela vetootherborrowers
(suchasexcellent,good,average,orA,B,C,etc.).Itispossibletohaveanexcellentscorefromonescoring
modelandagoodscorefromadierentscoringmodel.
Whyisitimportanttohaveaposi vecredithistory?
Aposi vecredithistoryinformslendersthatyouarefinanciallyresponsibleandthereforeposelessrisk.Ifyou
haveanega vecredithistoryornocredithistoryyoumaynotbeabletoobtaincredit.
Credithistoryalsohelpsalender
determinethetermsofcredit
granted.Thesetermsmayinclude
theinterestrateandloanlength.
Overalife me,youwillpaymore
forcredit(inhigherinterestrates
andfees)ifyouhavealowercredit
scoreasillustratedintheexample:

Thisisbasedona3year,$15,000automobileloan
FICOScore

InterestRate

730
660
590

6.16%
8.77%
14.43%

Monthly
PaymentMade
$457
$475
$516

TotalAmount
Paid
$16,452
$17,100
$18,576

Note:Asyourcreditscoredecreases,yourinterestrateincreases.

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2.6.1.F1

Credithistorycanaectmorethanjustcredit.Italsoimpacts:

Insurance
Insurance
companiesmayuse
yourcreditreport
and/orscoreto
decidewhetheryou
cangetinsurance
andtosettherates
youwillpay.

Employment
Employersmayuse
yourcreditreportif
yougivethem
permissiontodoso,
todecidewhetherto
hireyou.

PublicU

lityServices
Telephone,cable
andu lity
companiesmayuse
yourcreditreport
and/orscoreto
decidewhetherto
provideservicesto
you.

Housing
Landlordsmayuse
yourcreditreport
and/orscoreto
determinewhether
torentaplaceto
livetoyou.

Howdoyoudevelopaposi vecredithistory?
Understandingwhatisincludedinyourcreditreportandwhatinforma onisusedtocalculateyourcreditscore
willhelpyoutokeepyourcredithistoryposi ve.Followthese ps:

Payyourbillsconsistentlyandon meSe ngupautoma cpaymentscanensurethisgetscompleted.

MaintainreasonableamountsofavailablecreditKeeplowbalancesoncreditcardsandotherrevolving
creditwithcreditlimits.

ApplyforcreditsparinglyWhenyouapplyforcreditalender
willmostlikelyrequesttoviewyourcreditreport.Thisis
recordedasaninquiry.Inquiriesfromalenderthatare
ini atedbyyouwhenseekingaddi onalcreditmaynega vely
aectyourcreditscore.However,creditscoringmodels
recognizethatapersonmaywanttoshoparoundtofindthe
bestcreditterms.Therefore,mul pleinquiresforthesame
typeofloan,likeamortgageorautomobileloan,arecounted
asasingleinquiryifconductedwithinany14dayperiod.This
minimizesoreliminatesanyimpactonacreditscore.Inquires
thatarenotini atedbyyou(suchasforpreapprovedcredit
oers),inquiriesnotrelatedtocredit(suchaspreemployment
checks),andcheckingyourowncreditreportdonotaectyourcreditscore.

HaveamixofdierenttypesofcreditaccountsandnottoomanyofonetypeofaccountAmixofclosed
endcreditandopenendcreditmayimproveyourscore.However,toomanyofeithertypeofcreditmay
alsohurtyourscore.

CheckyourcreditreportannuallyConfirmthatallinforma oniscorrect.
Havingnocredithistorymayalsoresultinthedenialofcredit.Youwillnotdevelopcredithistoryifyouhave
nocreditaccountsinyournameorpaycashforallpurchases.
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2.6.1.F1

Howdoyoubegintodevelopacredithistory?
Tobeginbuildingaposi vecredithistory,expertsrecommendthatyouacquireandposi velymanagesmalllines
ofcredit.Thefollowingarecreditop onsforthosewhoneedtobeginbuildingposi vecredithistory:

Becomeanauthorizeduseronacreditcard:Have
aparentorguardianaddyouasanauthorized
useronacreditcardaccount.Anauthorized
userisntlegallyresponsibleforthedebt,butthe
historyanduseofthecreditcardisreportedon
theauthorizeduserscreditreport.However,
beinganauthorizedusermaynotcontributeto
theestablishmentofposi vecredithistoryifthe
creditcardhasnega vecredithistoryassociated
withit.Inaddi on,authorizeduseraccounts
typicallyhavelessposi veimpactoncredit
scoresanddependingonthescoringmodelmay
notbeincludedinthescorecalcula onatall
becausetheauthorizeduserisnotresponsible
forthedebt.

Obtainasmallclosedendloanfromadepository
ins tu on:Acquireasmallclosedendloanforan
itemthatyoualreadyhavemoneytopayfor.
Havethatmoneyavailableinaseparateaccount,
andsetupautoma cwithdrawalstomakethe
loanpayments.Thiswillensurenolatepayments,
showingthatyouusecreditresponsibly.Ifyou
areundertheageof18,youmusthaveanadult
cosignertoobtainaclosedendloan.

Obtainasecuredcreditcard:Asecuredcredit
cardrequiresacashsecuritydeposittoensure
paymentofthecreditcard.Essen ally,the
depositedmoneyensuresthecreditcard
companythatthecreditcardwillbepaid,
regardlessofwhetheryouhaveapriorpayment
history.

Obtainacosigner:Applyforacreditcardwitha
parentorguardianasacosigner.Acosignerisa
personwhoisequallyresponsibleforpayingback
debtunderthecreditterms.Makesureco
signersunderstandthattheyareequally
responsibleforthedebt,anditwillappearon
theircreditreportaswell.Then,managethe
creditcardaccountveryresponsiblybypaying
thebalanceonorbeforetheduedate.Inorderto
obtainacreditcardifyouareundertheageof
21,youmusthaveacosignerorproofof
sucientincometomakepayments.
Thinkbeforeyoucosign!
Regardlessofwhousestheaccountorpaysthe
bills,allinforma on,(goodandbad)willappear
onyourcreditreport.

ObtainingCreditReportsandScores
CreditReports

Byfederallaw,everyonemustbeabletoobtainonefreecreditreportfromeachofthe
threecreditrepor ngagencies(Equifax,Experian,andTransUnion)everytwelvemonths.
Youmayrequestyourcreditreportinthreeways:
1. Visitthewebsitewww.annualcreditreport.com
2. Call8773228228
3. Writeto:AnnualCreditReportRequestService,P.O.Box105281,Atlanta,GA30348
5281.Youwillhavetoprovidecertaininforma ontoaccessyourreport,suchasyour
name,currentaddress(andpossiblyyourpreviousaddress),SocialSecuritynumber,
dateofbirthandanswerques onsaboutyourpersonalcredithistory.

Lawsvary
betweenstates.
Somestatesmay
allowaddi onal
freeaccessto
creditreportsand
scores.

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2.6.1.F1

Therearemanywebsitesthatadver seaccesstofreecreditreports.
However,www.annualcreditreport.comistheonlygovernment
sponsored,freewebsite.Mostotherwebsiteschargesometypeoffee.
Tocon nuallymonitoryourcreditreport,itisrecommendedthatyou
requestacreditreportfromoneofthethreecreditrepor ngagencies
everyfourmonths.Ifyouneedmorethanoneofeachofyourcredit
reportsperyearyoucanacquirethematapricesetbylaw.Its
importanttorequestyourcreditreportevenifyouhaveneverused
creditbeforetoensurethatnooneisfraudulentlyusingyournametoobtaincredit.
Ifacompanydeniesyoucreditbecauseofinforma oninyourcreditreport,thecompanymustsupplyyou
withthenameandaddressofthecreditrepor ngagencythatsuppliedthecreditreport.Youcanthen
requestafreecopyofyourcreditreporttoreviewwithin60daysofbeingdeniedcreditregardlessof
whetheryouhavealreadyreceivedafreecopyinthepast12months.
Thelawthatallowsyouafreecopyofyourcreditreporteachyeardoesnotextendtocreditscores.Credit
scoreshavetobeorderedseparatelyandusuallycostafee.Thethreecreditrepor ngagenciesarethe
primarysourceforobtainingyourcreditscores,althoughFICOscorescanbeordereddirectlyfromFairIsaac,
Corp.Thecontentofyourcreditreportacrosseachofthethreecreditrepor ngagenciesmayvary,which
meansyoucouldhavethreedierentFICOscores(andsimilarlyforVantageScores).
WhatifIfinderrorsinmycreditreport?
Itisimportanttoexamineyourcreditreportsandmakesureallinforma oniscorrectbecausetheresalwaysa
possibilityoffindingerrors.Ifyoufinderrors,youhavetherightbyfederallawtodisputetheinforma onand
requestthattheerrorbedeletedorcorrected.
Tosubmitadispute,youshouldcontactboththecreditrepor ngagencythatprovidedthereportandthe
company/personthatprovidedtheincorrectinforma ontothecreditrepor ngagency.Yourdisputemustbe
inves gatedusuallywithinthirtydays.Whentheinves ga oniscompleteyouwillreceivethewri enresultsof
itsinves ga on.Ifthedisputeisfoundtobeanerror,eitherthecreditrepor ngagencyorthecompany/person
thatprovidedtheincorrectinforma ontothecreditrepor ngagencymustno fyallthreecreditrepor ng
agenciesoftheerrorsotheagenciescancorrecttheinforma oninyourcreditreports.
Ifyouaredissa sfied
Ifaninves ga ondoesnotresolveyourdisputeandremovetheinforma onfromyour
withthedispute
creditreport,youcanaskthatastatementofthedisputebeincludedinyourfuture
resolu on,youcan
creditreports.ThestatementwillbeincludedinaConsumerStatementsec onofall
fileacomplaintwith
futurecreditreports.Youalsocanaskthecreditbureautoprovideyourstatementto
theConsumer
anyonewhoreceivedacopyofyourreportintherecentpast,butyoumayhavetopaya FinancialProtec on
feeforthisservice.
Bureautoreceive
individualassistance.
Therearemanydebtrepairagenciesthatadver setheabilitytohelpaconsumerfix
his/hernega vecreditreportforafee.TheBe erBusinessBureau(BBB)andthe
FederalTradeCommission(FTC)agree:Consumerscandojustasgoodajobimprovingtheircreditreportsasafee
baseddebtrepairagency.Thereisnoimmediatefixfornega vecredit;itwilltake meandresponsiblecredit
managementini atedbytheconsumer.
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