Businesses and creditors have for years kept information about the people who use their business, using this information to determine whether to continue offering an individual services. Until the advent of modern technology making it easier to reliably send information across long distances, these records were usually only used internally or in specific locations.
However, beginning in the eighteenth and nineteenth centuries, businesses began sharing these records with each other on a much larger scale, which is the basis for the modern credit report.
As is often the case, with no oversight banks, mortgage lenders, and other creditors were quick to abuse this system. They began storing all sorts of personal information in credit reports, including race, gender, religion, and sexual preference. Worse, the lenders would then use this information to deny or approve a loan.
To help address this problem, the Fair Credit Reporting Act was passed in 1970. Since then, the law has been changed many times, but its premise, to regulate the credit reporting industry, remains the same.
The Fair Credit Reporting Act helps to regulate both credit reporting agencies, as well as who can provide information to these agencies.
There are three main credit reporting agencies, Equifax, TransUnion, and Experian. These agencies compile information about how a person uses their credit lines, including tracking payment history.
As part of the Fair Credit Reporting Act, these agencies are required to ensure that there is a way for consumers to address errors on their credit report and that these errors are removed in a timely manner. They are also not allowed to keep information indefinitely and in most cases can only cover the last 7 years, although bankruptcies can be kept on a credit report for up to 10 years.
Only recently, consumers were given the right to see a copy of their credit report for free and purchase a copy for a fair price.
While a big part of the Fair Credit Reporting Act is aimed at regulating credit reporting agencies, it also deals with who can report information to these agencies and what type of information can be added to a credit report.
As part of the Fair Credit Reporting Act, agencies that report information to credit reporting agencies must:
The Fair Credit Reporting Act also puts limits on who can report information to credit reporting agencies, which is usually limited to banks, credit unions, and other creditors. It also put regulations on how credit reports can be used for background checks by employers.
While the Fair Credit Reporting Act took steps to help make the credit reporting industry more transparent and less discriminatory, it still has a long way to go and it would require a number of other laws to bring the credit industry under better control.
There are usually a number of factors that a lender will consider when deciding whether or not to offer someone a mortgage. For many lenders, a persons credit score is a very important consideration. Credit scores are a number between 300 and 850, which represents how credit-worthy the individual is.
Lenders and merchants have been using credit reports for thousands of years, which is basically information about a persons borrowing and spending habits that is shared among businesses. However, the credit score was not developed until 1958, when the Fair Isaac Corp implemented a system to analyze credit reports and rate them on a numerical scale.
As is the case with a credit report, credit scores are intended to provide a non-discriminatory means of evaluating a persons creditworthiness, so race, gender, and religion do not come into play.
Since the development of the Fair Isaac Corp credit scoring system, which is called a FICO score, several other companies have developed their own credit scoring system, but none have become more popular than the FICO Score.
While each of the three credit reporting agencies are required to provide a free copy of your credit report every year, there is no such requirement for your credit score. Instead, consumers must purchase their credit score, which typically costs between $6 and $16. Each of the credit reporting agencies also offer a proprietary credit score, but these scores are different than the credit score offered by the Fair Isaac Corp.
There are a number of different factors that go into a FICO credit score, which is based off of information from a each of the three credit reporting agencies. A persons FICO score considers several different factors and rates people on a scale between 300 and 850, with 850 being the highest credit score possible.
The following factors are considered when generating a credit score:
Payments:
Length of Recorded Credit History:
Different Types of Credit:
How Much is Owed:
New Credit Lines:
Each of the above factors is considered by the Fair Isaacs Corp when they generate a persons credit score. Since there are so many different factors, it is very easy for a mistake on a credit report to result in a lower credit score, which is why it is so important to regularly check your credit score for errors.
There are three different credit reporting agencies, which provide all of the Credit Reports. These companies collect information into a single database and then resell it to interested banks or lenders.
These three companies, Experian, Equifax, and TransUnion, all provide the same report, but it is possible that a discrepancy could show up on one, which might not be visible on the others. However, once it shows up in the database of one of the credit reporting agencies, the error will subsequently be transmitted to the other two agencies.
As a result of how easy it is for a discrepancy to propagate itself among the three credit reporting agencies, it is important to regularly check all three and fix any errors as they arise. Checking your credit report is often one of the first ways that you can tell if you have been the victim of identity theft as well,
Each person is eligible to receive one copy of their credit report for free from each of the three companies every 12 months. One of the easiest ways to get a free copy of your credit report is to use annualcreditreport.com. You will have to create an account at annualcreditreport.com, then select which credit agency you want to send you the report.
However, it is not a good idea to get all three reports at once. Instead you would want to receive one copy and review it, spreading out all three over the course of a year. They are supposed to share their information, so fixing an error at one agency should fix it at the other two.
Always remember to keep track of who you have already asked for a credit report, so you can get all three free credit reports every year.
Errors can occur because of several reasons, but it is most often because a creditor did not record a payment. In this event, even though you paid the debt, it is reported as a late or missed payment, which will hurt your credit score. If you find an error like this, it is important to act on it as soon as possible.
First, collect all the documentation you can to show that you paid the bill or debt. This includes check stubs, bank statements, and any letters from the creditor. Once you have the documentation, you will need to send a letter explaining the problem to both the credit reporting agency, as well as the creditor. Along with the letter, you will have to send your personal information, such as name, address, birth date, and social security number. It is a good idea to speak with the creditor as well, because they can often fix the error on their end quickly.
It is important to be careful when fixing errors though, because creditors take into account how often the credit report has been accessed. So, it is possible to raise alarms if too many people run your credit while you are fixing the error. If at all possible try to fix the problem as soon as possible, so the people that are accessing your credit report to fix it are not get stretched out over an extended period of time.
Once the error has been fixed, it is very important to ensure that it has been removed from your credit report.
When applying for a loan or mortgage, many lenders will charge the borrower for the credit report. If they charge more than $20, then they are very likely being dishonest, because this is the standard rate. Since checking the borrowers credit report is often the first thing a creditor does, it is important to know whats on your credit report and fix as much as you can before applying for the loan.
In regards to current debt and outstanding payments, it is a good idea to pay these down as much as possible before speaking with a lender. It is also possible that there may be a mistake on the credit report, which even if you have documentation for, you bank would not overlook.
One of the most important things a prospective homeowner can do to improve their chances of receiving a mortgage is to reduce the amount of debt on their credit report. This can be a great first step to new home ownership.
Credit reports are often used by creditors to determine how much of a risk a person would be to lend to. These reports contain information about a persons financial dealings, with some other limited personal information.
There are a number of people who could potentially view your credit report, including the government, banks and other creditors, and insurance companies. It is also possible for employers, both present and prospective, to view your credit report. This is common in professions where they are worried about company theft or embezzlement.
In fact almost anyone can see your credit report providing that they are able to offer an actual financial reason why they should be able to see your credit report. Each person is also eligible to receive three free copies of their credit report every year, one from each of the different credit reporting agencies.
Since there are so many potentially important people who could looking at your credit report, it is important to identify any problems and try to fix them as soon as possible. This can not only make it easier to receive a loan or mortgage, but can also effect many other parts of your life.
At first glance, a credit report can seem very confusing, but all of the information in a credit report can basically be divided into four sections.
Personal Information: Credit Reports are prohibited from containing information about race, religion, or sexual orientation, but they do contain a great deal of other identifying information.
This includes the persons name, aliases, current addresses, previous addresses, Social Security Number, Date of Birth, current employer, past employer, and information about husbands or wives.
Credit Information: As the name implies, credit reports contain a great deal of information about your credit history. This includes mortgages, credit card debt, unpaid debt, debt that has been sent to a collections agency, and some utility information. Also, in the case of loans it has information such as the type of loan, length, cosigners, and a two year payment history.
While the credit information is usually very inclusive, it can not include bankruptcies that are more than 10 years old or other debt that is older than 7 years.
Information from Public Records: This includes any state or country government records, including information on bankruptcies, tax liens, or other civil judgments. It can also include child support.
Recent Credit Report Requests:: This section lists the people who have requested your credit report over the last year, although it goes back 2 years for employers. Sometimes, too much activity can raise a red flag to lenders and may also be an indication of identity theft.
Preparing to buy a new home can be a very daunting process, especially for a first time home buyer. Due to the current financial situation, in many cases lenders have become much more strict with who they will lend to and are much more likely to throughly analyze the finances of a prospective home buyer, more so than they would have only a few years ago.
For many lenders, having a high credit score with limited or manageable debt is a key factor in offering an individual a home loan, with some lenders now requiring minimum credit scores of 700. A persons credit score is a number that is based off of information on your credit report. Whenever you make a purchase on credit, are delinquent on a bill, or make a payment on your line of credit, this information is added to your credit report. In the case of a delinquent or unpaid bill, your credit score would likely be lowered, while a record of on time payments will raise your credit score.
A credit score of 850 is considered to be perfect, while a credit score of 300 is considered to be fairly low. With many lenders tightening their restrictions on financing mortgages and requiring a credit score of over 700, they have successfully limited the number of individuals who will now qualify for a home loan.
These restrictions help to highlight the importance of thinking about the big picture when using a credit card or deciding not to pay a bill. While missing a payment or making a late payment might not be a big deal at the time, if this prohibits you from getting a mortgage a year later, it has effectively cost you much more than a little bit of extra interest.
When preparing to apply for a mortgage, it is important to first take steps to repair your credit report and take care of any delinquent or unpaid bills. This will not only help raise your credit score, but will also show a strong sense of commitment to the bank or mortgage broker, who will see that an effort has been made to be fiscally responsible.
Not only will a lender take your credit score and borrowing practices into account when you apply for a home loan, but they will also consider your net worth. Your net worth is basically the difference between your total assets and how much money you owe. So, even if you were to make six figures a year, if your liabilities were also six figures, then you would not be considered to have a very high net worth.
Both your net worth and credit rating are two very important factors a mortgage broker or other lender will consider when deciding whether to offer you a mortgage and how much of a mortgage to offer. So, not only should you try to clean up your credit report well before applying for a mortgage, it is also a good idea to try to reduce your overall liabilities whenever possible.