Your Credit History and Credit Score

There are three major credit reporting agencies used in the United States: Equifax, Transunion, and Experian. These companies collect information about you from financial institutions with whom you do, or have done, credit-related business. They then sell that information back to financial institutions with whom you want to do new business. Whether or not you will be approved for the new business will be based on the details of your credit history and your credit score.

What's in your credit history report?

Personal Information - Your name, address, Social Security number, date of birth and employment information are used to identify you. Updates to this information come from information you supply to lenders.

Trade Lines - These are your credit accounts. Lenders report on each account you have established with them. They report the type of account (bankcard, auto loan, mortgage, etc), the date you opened the account, your credit limit or loan amount, the account balance and your payment history.

Inquiries - When you apply for a loan, you authorize your lender to ask for a copy of your credit report. This is how inquiries appear on your credit report. The inquiries section contains a list of everyone who accessed your credit report within the last two years. The report you see lists both "voluntary" inquiries, spurred by your own requests for credit, and "involuntary" inquires, such as when lenders order your report so as to make you a pre-approved credit offer in the mail.

Public Record and Collection Items - Credit reporting agencies also collect public record information from state and county courts, and information on overdue debt from collection agencies. Public record information includes bankruptcies, foreclosures, suits, wage attachments, liens and judgments.

What's your credit score?

Your credit score is derived from your credit history, but is not part of your credit history report that is now available for free to most consumers (see below).

The two major components of your credit score (often called FICO score), which account for 65% of the total score, are payment history and amounts owed on debts and credit cards. Where the first is a record of how well you have met your obligations over the years, the second is a snapshot of your indebtedness right now. If your credit history is short, your current indebtedness can be the most important factor determining your credit score.

You might think that, somehow, your assets such as savings and equity, should enter into the equation. But this is not the case. Credit reporting agencies have no way to know what money you have socked away to back up any debts that you may have. Therefore, they have to work with only what they have.

The approach they use is to compare the outstanding debt on each of your accounts with the maximum amount of debt that the credit grantor has set for you on that account. This generates a set of "utilization rates" for each of your accounts. For example, if you have two credit cards with maximum balances of $4,000 and $5,000, and if the actual balances are $3,000 on both as of the most recent date of record, the utilization rates are 75 percent and 60 percent, respectively.

Other things the same, the higher the utilization rates, the lower the FICO score. The FICO formula interprets high ratios to mean that the borrower is living closer to the edge.

The company that developed the formulas for determining credit scores is the Fair Isaac Company (hence, FICO) but they do not disclose exactly how the formula works. Therefore, it is somewhat difficult to figure out the best strategy for improving scores.

Since your FICO score only looks at information in your credit report, lenders look at many things when making a credit decision including your income, how long you have worked at your present job and the kind of credit you are requesting. This is information that you provide on your credit application. Often, proof of income is required in the form of copies of pay stubs or income tax forms.

Getting a copy of your credit report and score

You can get a copy of your credit history from each of the reporting agencies, often for free. However, getting a copy of your all-important credit score is not quite as easy, and is not free.

Copies of your credit report are available from each of the three credit reporting agencies. Credit scores can be purchased for an additional fee. Equifax, one of the three companies actually sells a "3-in-One Plus Score" package that conveniently allows you to see your reports from all three companies online, instantly, along with your credit score.

Some states (Colorado, Georgia, Massachusetts, Maryland, Vermont and New Jersey) have legislation that permits residents of those states to receive free credit reports. New federal legislation, as of December 1, 2004, now puts in place a phased plan to make free reports to anyone in the United States. It will allow consumers to get a free credit report once a year. Residents in the Western states will be able to make requests beginning Dec. 1, 2004. Other parts of the country will be phased in by Dec. 1, 2005. Midwestern states will be able to make requests starting March 1, 2005; Southern states can order starting June 1, 2005; and the East and Northeast beginning Sept. 1, 2005.

Again, a reminder that a credit history report does not contain your credit score, which is the primary determinator of mortgage and loan rates and approvals. To see your score, you must pay a fee.

For more information, go to www.annualcreditreport.com.

Credit Reporting Companies

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