What is a credit report?
A credit report can be broken down into 6 parts.
»A Credit Report is a history of how well you repay debt
»A Credit Report shows how long you have had credit for
»A Credit Report shows your personal information such as names, addresses (past and present), employers, phone numbers, and any variances of such.
»A Credit Report shows the amount of available credit you have. (i.e. your buying power)
»A Credit Report shows how often you have applied for credit (inquiries)
»A Credit Report shows the different types of credit that you have.
What is a credit report used for?
»A credit report is used to determine the amount of risk in lending you money. The level of risk is determined by 6 main factors and calculated into a credit score. The most commonly used score is the FICO score, created by the Fair Isaac Company. This score ranges from 300 – 850, the higher the score, the less of a risk you are, and the lower the score the higher the risk. From the lender’s point of view, the lower your score is, the more likely you are to default on a loan. So they will be less likely to approve you for a loan, or if they do approve you, the interest rate charged on the loan will be very high because it’s a riskier investment for them. Think of it this way, if you want to invest your money you can put the money into a savings account or buy some stocks. The interest rate for the savings account will be low because it’s a very low risk investment; you are basically guaranteed a return. But, if you invest your money into the stock market, you will want a higher return on your investment because the risk of loss is so high. Banks look as us in pretty much the same way and if you want to pay a lower interest rate and save some money, you have to show the bank that you are a low risk investment. Currently, the only way to do that is to have a high credit score. Ultimately, it’s all about stability, we’ll discuss this later on.
Note: There are different types of FICO scores, Mortgage companies use the Classic FICO Score, Auto Lenders use the FICO Auto Industry Option Score. The difference is quite simple, the Classic FICO Score ranks previous mortgage accounts a little higher than all other accounts. And the Auto Industry Option Score puts more weight on previous auto loans than other accounts.
Who maintains Credit Reports?
Credit Reports are maintained by the Credit Reporting Agencies, also known as the Credit Bureaus. Although most people think that there are only 3 credit bureaus, there are actually a lot more than that. The 5 biggest credit reporting agencies are listed below. Click Here for more info about credit bureaus.
Where can I get a FREE Credit Report?
There are several websites that advertise free credit reports. Most of these sites are actually owned by the credit bureaus themselves, but still require a credit card and a subscription to give you access to the credit report.. FreeCreditReport.com (Experian), FreeCreditScore.com (Experian), TrueCredit.com (TransUnion), etc… But there’s only one place to get your totally free credit report, without a credit card or subscription, as mandated by the Fair Credit Reporting Act (FCRA). AnnualCreditReport.com.
Negative items listed on a credit report are notes of past financial mistakes or lending choices that will lower a consumer’s credit score. Credit bureaus track derogatory items to determine how financially reliable and responsible a borrower is.
While most negative items will stay on your credit report for seven years, bankruptcies will stay for ten years, hard inquiries will stay for two years and some unpaid student loans can stay forever.
If you have negative items listed on your credit report there are still ways to mitigate their effect on your credit score, and even remove them from your credit report. Here’s an overview of how long each negative item stays on your credit report, and how you may be able to remove the items from your credit report.
Hard Inquiries: Two Years
Hard inquiries generally stay on your credit report for two years. It’s difficult to avoid them because they occur when lenders run your credit for car loans, credit cards, mortgage loans and other application processes. You can minimize how frequently hard inquiries occur by doing research upfront and submitting loan applications to just one company at a time instead of many.
If you are looking to apply for a credit card, first research which credit card is right for you. Then, only apply for the card you are certain to qualify for.
One upside is if you’re comparing rates between lenders within a compact timeframe, the effect of multiple inquiries will only be counted as one. The timeframe is between 14 days and 45 days depending on the credit scoring model being used,
Collection Accounts, Late Payments and More: Seven Years
You can expect the following items to stay on record for about seven years:
Credit repair can minimize or even remove the impact of some of these items. For one thing, some items may be inaccurate. Also, the lender may not be able to substantiate the account. Take a charge-off for example. The creditor should be able to show things such as your payment history, the current balance of the account, the initial agreement between you and the creditor and, if a collection agency is involved, the right of the agency to pursue the debt and the transfer of debt ownership. If these standards are not met, the odds of you possibly getting that item removed before seven years pass are much higher.
Chapter 7 Bankruptcies: 10 Years A Chapter 7 bankruptcy stays on your credit report for up to 10 years. Although most of the individual accounts associated with the bankruptcy (such as a delinquent car loan) should disappear within seven years. The credit repair process can make sure the bankruptcy is reported accurately and that any accounts associated with it are being treated accordingly.
Unpaid Perkins Federal Student Loans: Forever
Unpaid Perkins Federal student loans might never come off your credit report. This is because the money you borrowed is money from the government. Not only that, but federal student loans cannot be discharged through bankruptcy. Unpaid private student loans come off after about seven years.
The Bottom Line
Creditors do not always send accurate information to the credit bureaus, and accounts can be linked to the wrong people. Credit repair services can help check for errors and make sure that creditors report accurate information on your credit reports to get you the most accurate score possible.
Credit scores give lenders a fast, objective measurement of your credit risk. Before the use of scoring, the credit granting process could be slow, inconsistent and unfairly biased. Credit scores – especially FICO® scores, have made big improvements in the credit process. Why?
People can get loans faster.
Scores can be delivered almost instantaneously, helping lenders speed up loan approvals. Today many credit decisions can be made within minutes. Even a mortgage application can be approved in hours instead of weeks for borrowers who score above a lender's "score cutoff". Scoring also allows retail stores, Internet sites and other lenders to make "instant credit" decisions.
Credit decisions are fairer.
Using credit scoring, lenders can focus only on the facts related to credit risk, rather than their personal feelings. Factors like your gender, race, religion, nationality and marital status are not considered by credit scoring.
Credit "mistakes" count for less.
If you have had poor credit performance in the past, credit scoring doesn't let that haunt you forever. Past credit problems fade as time passes and as recent good payment patterns show up on your credit report. Credit scoring weighs all of the credit-related information, both good and bad, in your credit report.
More credit is available.
Lenders who use credit scoring can approve more loans, because credit scoring gives them more precise information on which to base credit decisions. It allows lenders to identify individuals who are likely to perform well in the future, even though their credit report shows past problems. Even people whose scores are lower than a lender's cutoff for "automatic approval" benefit from scoring. Many lenders offer a choice of credit products geared to different risk levels. Most have their own separate guidelines, so if you are turned down by one lender, another may approve your loan. The use of credit scores gives lenders the confidence to offer credit to more people, since they have a better understanding of the risk they are taking on.
Credit rates are lower overall.
With more credit available, the cost of credit for borrowers decreases. Fewer bad loans to write off makes the credit granting process less costly for lenders, and they in turn are able to pass this savings on to customers in the form of overall lower interest rates. Without the use of credit scoring, interest rates would be significantly higher.