A good credit report could be the key to getting the personal loan or mortgage you want, as well as securing the loan at a favorable interest rate. A typical credit report contains a great deal of personal financial information—information that is
used by potential creditors, employers, insurers, and others to assess your creditworthiness.
Here’s how it works: There are three main credit reporting firms in the U.S. — Experian, Equifax, and TransUnion. These firms sell the information in your report to lenders, insurers, employers, and other organizations that have a vested interest in your prompt repayment. These entities use the credit information to evaluate your applications for loans, credit cards, insurance, employment, or a lease. According to the Federal Trade Commission, credit reporting companies collect and sell four basic types of information:
- Identification and employment information: Your name, birth date, Social Security number, employer, and spouse’s name. The company may also provide information about your employment history, home
ownership, income, and previous addresses.
Payment history: Your accounts with different creditors are listed, showing how much credit has been extended and whether you’ve paid on time. Related events, such as the referral of an overdue account to a collection agency may
also be noted.
Inquiries: Credit reporting companies must maintain a record of all creditors who have asked for your credit history within the past year, and a record of individuals or businesses that have asked for your credit history for employment purposes for the past two years.
- Public record information: Information pertaining to bankruptcies, foreclosures, or tax liens, may appear in your report.
How Your Credit Score Fits In
Your credit score represents your ability to repay your debt in a timely manner, based on the information contained in your credit report. Lenders use a number of facts to make credit decisions, including your credit score. The numerical score most often used is provided by the Fair Isaac Corporation, otherwise known as FICO®. It is based on a complex mathematical formula and can range anywhere from 300 to 850. In general, a FICO® score above 650 indicates that you have a very good credit history and demonstrates that you are less of a credit risk.
FICO® score calculations use the information individually from the reporting agencies and reflect your payment history, how much of your available credit limit are you using, new debt you may have assumed, and how long you have been borrowing. Therefore, if one agency has different information from another agency, the FICO® scores may differ.
Obtaining Your Free Report
You may have heard advertisements on the radio or on TV that promise free credit reports. Typically, if you respond to one of the advertisements, you can obtain a free report only if you make a purchase – for example, some offer debt counseling or require you to sign up for an identity protection service. Your best bet is to steer clear of these ads, many of which can be misleading, and instead request a free report as outlined below.
You can obtain a truly free credit report from each of the three nationwide credit reporting companies once every 12 months. You have the option to request all three reports at once or to order one report at a time. By requesting the reports separately, you can monitor your credit more frequently throughout the year.
The three companies use one website to process requests: www.annualcreditreport.com. You can also request a free report by phone at 1-877-322-8228 or by mail by completing the “Annual Credit Report Request” form on the site, https://www.annualcreditreport.com/cra/requestformfinal.pdf) and mail it to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281. In addition, some states offer consumers free credit reports under state law. These include Georgia, Maine, Maryland, Massachusetts, New Jersey and Vermont.
Once you receive your report, review it to ensure that the information is up-to-date, and most importantly, is accurate. If you see credit card accounts or loans or other credit instruments/debt that don’t look familiar, contact the credit reporting agency—as well as the lending institution or credit card provider—immediately.
If you believe you’ve been the victim of identity theft, contact your local police or you can file a complaint with the Federal Trade Commission (FTC). The FTC outlines the steps you should take to rectify the situation.
Maintaining good credit and having a good credit report can help pave the way for you to achieve your financial and lifetime goals. An excellent source of information is the Federal Trade Commission’s publication, Building a Better Credit Report. In addition, your financial advisor can provide guidance on matters of credit and debt repayment or consolidation.