Watch video: How to set yourself for your credit success
DIY credit repairby Michael Bovee
What is a credit report?
A credit report is a record of a consumer's credit standing or activities. The report primarily consists of personal information of the consumer, credit inquiries, public records information, credit lines, consumer statements, etc.
You can have a glimpse of your credit profile from these reports. Alternatively, the creditors/lenders/financial institutions check your credit reports before deciding to lend money. This helps them know whether or not the potential borrower can carry and pay off the debt.
What are the credit reporting agencies?
Well, credit reports are prepared by the Credit Reporting Agencies, also known as credit bureaus. In our country, you will find 3 major credit reporting agencies which are Experian, TransUnion, and Equifax.
They gather information on the consumer credit activities from the creditors and prepare reports. Each bureau has its own format of the credit report. However, the information remains more or less the same.
Is it important to get credit reports from all the credit bureaus?
Well, it is important to order your 3 bureau credit reports when you are trying to find out your true credit score. You can get a free copy of your credit reports by visiting AnnualCreditReport.com.
Each credit bureau does the same thing but that does not mean that the credit score given by each bureau will be the same. Some agencies may not have the most current and up to date information (personal and account information). Just because one credit bureau has your correct information does not necessarily mean that all three do.
Secondly, another reason for a difference in reported credit scores is many variations of the FICO scoring system. FICO has a different scoring system for the various types of loans that are out there. For example, for mortgage loans, FICO Score 2, 4, 5 are used. Whereas for credit cards, FICO Score 8, FICO Bankcard Score 8 are followed.
Thirdly, credit reporting errors are not uncommon. And they can hurt your credit score in the long run.
So, you should check your credit reports from all the credit bureaus and find out if there is any discrepancy. If you find any errors, dispute it asap with each bureau individually.
So when you are trying to get your credit score, it is suggested to check all three scores.
What does your credit report include?
Your credit report includes all information about how you have been managing your credit accounts. It provides a clear idea to your lenders about your financial responsibility. Eventually, it helps the lenders to decide whether or not to extend credit to you in a better way!.
In your credit report, you will find a variety of information like:
- Your personal data
- Details of your accounts
- Payment history This section would contain information regarding the type of accounts both revolving and/or otherwise, names of the creditors, and most importantly your payment pattern. This section is the most important part of your report because this is the part the creditors would look into. You may find the following categories listed in it:
- Name of the creditors: This section would list out the lenders, the credit card companies, banks, mortgage, and auto loan lenders, who are reporting your payment history to the credit bureaus.
- Account number: Of course, the account numbers would be listed beside the creditors. You may have more than one account with a certain creditor. This section would also list the nature of the account,such as:
I – Individual
U – Undesignated
J – Joint
A –Authorized user
S – Shared
- Account details: The account detail section would include information like:
- Date when the account was opened
- Status of the account (open, revolving, installment, etc.)
- Derogatory/ charge-offs
- Credit limit
- Terms for installment loans
- The period reviewed in the report
- Collections on your accounts
- Credit inquiries
- Public records
The first section of your credit report comprises your personal data, such as your SSN (Social Security Number), your employment history along with your current and previous addresses.
Your credit report has detailed information about your accounts. It contains your name, account number, type of account, dates on which they are opened along with the status of each account.
Every credit account has its payment history, the last date of activity on it, and the contact information of the credit issuer. This section also contains a summary of your past-due accounts and the accounts with negative credit histories.
The information is also contained in the credit report if any of your accounts are in collections.
If you haven’t been able to make payments on any of your accounts and it has been sent to collection, then the information is contained in this section.
A credit inquiry occurs when you apply for a loan and permit the creditor to check your credit report. Besides, you may have to permit your employer, insurer, landlord to check your credit report for your background check.
Credit inquiries are classified into 2 types:
Hard inquiry: It occurs when you apply for a credit card or a loan and the lender checks your credit report to check your creditworthiness. In this regard, you should know that hard inquiries can drop your credit score to some extent.
Soft inquiry: It occurs when your creditors or an institution checks your credit report for your background check. For example, when your current creditors check your account status when your employer checks your credit report for checking your financial responsibility, etc.
Both soft and hard inquiries remain on your credit report for about 24 months.
It shows the information about bankruptcies, repossessions, and foreclosures. Earlier, tax liens and judgments were also included in the public records on your credit report.
But after the 2015 settlement between the credit reporting agencies and the attorney general of 31 states, it was decided to remove all tax liens and judgments from credit reports to make it more accurate.
Usually, public records stay on your credit report for about 7 years. However, a Chapter 7 bankruptcy can stay on your credit report for up to 10 years.
5 Red flags on your credit report that reveal you’re in trouble
A clean credit report signifies good financial health. And lenders love to lend money to financially healthy people.
If you’re planning to apply for a credit card or a mortgage, it’s high time you have a look at your credit report. If you find any one of these items on your credit report, beware. Your application for a credit card or a loan may not get approved by the lenders.
- Collection accounts
- Short sale
Instances are there where bankruptcy has helped to boost someone’s credit score by reducing the credit utilization ratio. Even if your credit score increases despite filing bankruptcy, you can’t ignore the fact that it’s the last thing that a potential lender would like to see on your credit report.
The bankruptcy indicates that you have given up all hope for paying off debts. And that's bad consumer behavior. When lenders check your credit report, they’re likely to think twice before approving your loan application.
You’ll have to wait for a year or 2 to get an attractive mortgage after discharging your debts.
Oops! It already hurts to see your dream home being sold in an auction. And, you’re reminded of this ugly fact when you see foreclosure on your credit report.
A foreclosure remains on your credit report for 7 years. Plus, it dips your credit score by more than 200 points.
If you have a stellar credit score, then be ready for a shock. If your credit score is 800, then it would dip by 200 points minimum. This means your credit score will be somewhere in 600.
This type of account status means you can get a call from debt collectors anytime. Your accounts have been assigned to debt collection agencies after you have stopped making payments to the creditor.
This negative remark means you’re not a responsible credit cardholder. The mark will be there on your credit report for 7 years.
The only way to change the situation is to pay off the unpaid balance. Once you do it, the account status will be changed from ‘unpaid’ to ‘paid.’ But this won’t help to inflate your credit score significantly.
Potential lenders will feel relaxed before giving you credit when they see that you have paid off a collection account.
This type of mark on your credit report means your account has been charged-off. This means the creditor has failed to recover money from you. He has reported the account as a loss to the IRS.
A charged-off account gives a very bad signal to creditors. Plus, it damages your credit score. And, don’t forget that you still owe the debt. Creditors may assign or sell the account to collection agencies. The debt collection agencies won’t allow you to stay in peace until your debts are paid off.
Like a collection account, a charged-off account stays on your credit report for 7 years and 180 days.
This is a red flag to lenders since they realize the fact that you’re not a good borrower. You have missed your mortgage payments, your house is underwater and doesn’t have any possibility to pay it off. Being left without any choice, you sell your property for less than the amount owed to the mortgage company.
The lender may pursue you for the deficit balance, and you would have to pay the remaining amount anyhow. A short sale happens after you take permission from the lender. If you pay off your mortgage by a short sale, a charge-off, a settlement, a deed-in-lieu of foreclosure or “settled for less than the full amount due” will be reported on your credit report. It can result in a drop in your credit score by 60 to 160 points. A FICO study reveals that if you short sale your home, it can slash your credit score of 780 to 620. And a short sale can remain on your credit report for up to 7 years.
How often is your credit report updated?
Have you recently paid off your credit card bill? Or, have you defaulted a payment?
If yes, you might be getting anxious about when your credit report will be updated. But let me tell you, the changes do not always show up instantaneously on your report.
Lenders inform the CRAs (Credit reporting agencies) with updates according to their schedule usually about every 30 to 45 days. And based on each report, adjustments are made in your credit report. As your credit report changes, so do your credit score!
How will you stay updated on the status of your credit report?
It’s a good idea to keep checking your credit report every quarter. And check any discrepancies need to be disputed. Once you have disputed an item, check your report again after 30 days and see if the changes show up.
Consider the following steps to stay up-to-date on the current happenings of your credit report:
- Check your credit history report
- Stay patient
- Give yourself time
This should be done at least once a year, and you should get a copy of your report to ensure that it is both accurate and complete. You may also get copies of your credit score.
It is important to remember that it can take over a month for updated information to show up on your credit reports due to the reporting process of your lenders.
So if you recently paid off the balance of a credit card and are anxious to see how it affects your credit score, remember that it may take some time to see that the lower balance has been reported.
If you are applying for an auto loan, mortgage, or another major loan program, it is a good idea to check your credit reports between 3 and 6 months prior. This will allow you the time that you need to update and correct your credit report, if necessary.
Does my credit score change with changes in my credit report?
Well, your credit score may fluctuate a bit daily. The reason being your creditors keep on updating your credit report throughout the month. And when you check your credit score, it shows the result based on your credit report at that point in time.
So, your credit score can change depending on any information added or deleted to your credit report.
So, if you notice some minor changes in your credit score, no need to worry! However, if there is a substantial drop in your credit score, you should look into the matter asap!
Can any information be removed from my credit report?
Any genuine negative information on your credit report can’t be removed unless it’s at least 7 years old. For example, a Chapter 13 bankruptcy will be removed automatically from your credit report after 7 years it has been filed.
However, if you notice a negative information about a debt that you have already paid off, you should dispute it asap. Besides, if you are a victim of identity theft, immediately file a dispute.
So, I would suggest you continue to monitor your credit regularly to ensure that any negative information has been removed when it was supposed to be.
Are you aware of the latest credit scoring versions of FICO?
According to a CNBC Make It report, almost 110 million consumers could see their credit scores change under the new FICO scoring model.
As we discussed earlier, due to the settlement between the CRAs and the attorney generals, all the tax liens and judgments were removed from the credit reports.
Eventually, many people noticed an improvement in their credit scores. And that led them to take out loans that they can’t afford to pay off. As a result, the total household debt has increased a lot in our country.
FICO has come up with its new FICO Suite model to provide the creditors and lenders a more accurate analysis of your credit risk based on the trended data.
According to a report by FICO, the new scoring model would help the lenders to reduce default payments for credit cards and auto loans by 10% and 9% respectively.
The FICO Suite model comprises FICO 10 score and the FICO 10 T score. Like the earlier versions, FICO 10 score considers the 5 factors like payments history, amounts owed, credit mix, new credit lines, etc.
But FICO 10 T will contain the information about how you have managed your credit lines in the last 2 years. For example,it will consider your outstanding balance amounts, minimum payments required, amounts you paid on your recent credit card.
So, if you don’t have a history of paying off your outstanding balance amounts in full, your credit score may reduce. Because the FICO Suite model takes late payments very seriously.
Besides, if you take out a personal loan to consolidate credit card bills and create new outstanding balances by using your credit cards at the same time, it can result in a drop in your credit score.
So, I would suggest you maintain a decent credit profile by making payments on time, not maxing out your credit cards, staying away from multiple credit applications, etc. And don’t forget to let us know about your feedback.