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This chapter is from the book

This chapter is from the book

Running Your Own Credit Report

The infamous credit report. Credit-reporting agencies maintain files on millions of borrowers, including you and me. Lenders making credit decisions buy credit reports on their prospects, applicants, and customers from credit-reporting agencies. Your credit report details your credit history as it has been reported to the credit-reporting agency by lenders who have extended credit to you. Your credit report lists what types of credit you use, the length of time your accounts have been open, and whether you’ve paid your bills on time. It tells lenders how much credit you’ve used and whether you’re seeking new sources of credit. These reports give lenders a broader view of your credit history than do other data sources, such as a bank’s own customer data.

Your credit report reveals many aspects of your borrowing activities. All pieces of information should be considered in relationship to other pieces of information. Credit scoring is useful because it makes it possible to consider all this information quickly, fairly, and consistently.

Where to Find Your Credit Reports

Under the Consumer Reporting Act, you’re entitled to a copy of all the information a credit bureau has on you. You need to find out what credit bureaus are telling people about you and find out who has been asking. Credit bureaus are not consumer friendly. They exist to protect businesses and banks from consumers. To do this, they calculate a credit score. This score is based on all the information in your credit report: history, late payments, paying ahead, amount of credit, over what period of time, and so forth.

The most common credit score is the FICO score, and lenders base their approval on this score. You have three FICO scores, one for each credit bureau, and you can get all three scores from myFICO (http://www.myfico.com). For more information, go to the myFICO site, or contact each credit bureau individually:

Understanding Your FICO Score

Credit bureau scores are often called "FICO scores" because most credit bureau scores used in the United States and Canada are produced from software developed by Fair Isaac Corporation (FICO). The three major credit-reporting agencies—Equifax, Experian, and TransUnion—provide FICO scores to lenders.

FICO scores give lenders the best guide to future consumer risk, based solely on credit report data. The higher the score, the lower the risk. No score says whether a specific person will be a "good" or "bad" customer, however. And although many lenders use FICO scores to help them make lending decisions, each lender has its own strategy, including the level of risk it finds acceptable for a given credit product. There’s no single "cutoff score" used by all lenders. The major score categories are below 620, 620 to 690, 690 to 740, 740 to 780, and above 780, with each category containing about 20% of the total overall U.S. population. The average score that’s also considered a good score is 690 to 740.

Depending on your FICO score, you’re loaned what is called "hard" or "soft" money. You get hard money when your credit is bad and your interest rate is high, and soft money when your credit is good and you can secure a lower interest rate. Table 3.1 shows the difference between hard and soft money.

How Your FICO Score Relates to Your Loan

Your FICO Score

Your Interest Rate

Your Monthly Payment

720–850

5.56%

$858

700–719

5.69%

$869

675–699

6.23%

$921

620–674

7.38%

$1,036

560–619

8.53%

$1,157

500–559

9.29%

$1,238


As you can see by this table, a difference of 161 points on your FICO score can mean the difference between 5.56% and 9.29% annual percentage rate (APR), or an increase in your monthly payment by $380 per month. If you paid this higher rate over the life of a 30-year loan, it would cost you $136,800—certainly reason enough to clean up your credit report.

How to Clean Up Your Credit Report

Now that you know about credit reports, how’s your credit rating? Is your credit report accurate? Probably not. You need to check your credit report once a year or at least before you go to a lender to get prequalified for a loan, whether it’s for a home, car, boat, whatever. Your credit report affects your interest rate and your monthly loan payment.

Credit reports can contain errors, often because the report is incomplete or contains information about someone else. Typically, these errors happen because you applied for credit under different names (using both Robert Jones and Bob Jones, for example), someone made a clerical error in reading or entering a name or address from a handwritten application, your social security number is wrong because of a typo or the lender misread the number, or loan or credit card payments were inadvertently applied to the wrong account.

A good credit score is important to you during the prequalification process because a better score gets you better interest rates. Better interest rates lower the amount of money you have to pay back and lower your monthly payment. This decrease can mean hundreds of dollars less you pay each month or hundreds more square feet in your new house.

I don’t want to scare you with all this intimidating information without giving you at least a small ray of sunshine. Forget all the horror stories you’ve heard about cleaning up your credit report. A miracle has happened: Even though credit bureaus have traditionally been unfriendly to consumers because their primary responsibility is to protect their clients (businesses and banks) from consumers, recently it’s become easier for you to generate a credit report and correct any mistakes in it.

To see how easy it is now to get your credit report and correct any mistakes, choose one of the three credit bureaus’ websites listed previously. Create an account by answering all the questions asked at the site. There will be a lot of prying questions, so keep your cool and be patient. When you have succeeded, you’ll actually see (and be able to print) your up-to-date credit report! It really is that easy.

If your report has any negative entries, they are listed at the top. Here’s the good part: Next to each entry is a Dispute button. Click the button for the first item to be disputed and fill in a paragraph or two explaining why you don’t think it should be there. Click the Submit button, and then go to the next entry. When you’re finished, you see a message saying that you’ll be notified within 30 days with an updated credit report.

When doing the research for this book, this is exactly what I did, and in 30 days, I was notified. I clicked the Get Report link, and four of the five items I disputed were gone. It’s that easy!

The five negative items on the credit report were all health insurance related: a few lab invoices and a doctor’s office visit. In the dispute response section of the initial report, I provided my health insurance carrier, group number, and an explanation of why the bill should have been already paid. This information was sent to the credit collection company that reported me to the original provider. The company reporting the collections has 30 days to respond when you dispute an entry. If the collection agency doesn’t respond or agrees with your explanation, the item is dropped. If the collection agency disagrees, the credit bureau sends you contact information so that you can try to resolve the collection yourself. In my case, the four lab invoices were dropped. For the remaining item, the doctor’s office visit, all I needed to do was call to work it out.

The credit bureau you use is supposed to notify the other two bureaus to remove the successfully disputed entries, but as they are competitors, this notification doesn’t always happen. It’s your responsibility to follow the same procedure with the two remaining bureaus.

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