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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.
For more information, see www.myfico.com.
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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