Credit Report: Knowing the Basics
By Alyssa Azran
04/12/07

There are three major credit bureaus, TransUnion, Experian, and Equifax. They compete against each other to maintain a report on your credit history. In order to generate such a report, they receive information from a variety of sources and compile it to allow many entities (including but not limited to creditors, lenders, insurers, and landlords) the ability to obtain a “snapshot” view of your credit worthiness or the likelihood they will get paid in the future if they are to lend you money or provide services to you. This snapshot has a tremendous weight in determining if you are eligible for a loan, how much you should be eligible for, and what the cost of the money to you will be.

A credit report generally includes a credit profile generated by each of the three credit reporting bureaus. In addition to your payment history, number of inquiries, and public records, this report includes such personal information as where have lived and where you currently live, your date of birth, current employer, previous employer, and any aliases you may have been known under.

Each credit bureau uses its own information attained on you to compute your credit score. Some basic rules they adhere to are as follows:

• The most recent information is given the most weight. Therefore, if you have a perfect payment history but made one late payment 3 months ago, your credit score will be lower than if you had the same perfect payment history but made one late payment 18 months ago.

• Every time an inquiry is made for your credit profile by a lending institution, etc., it negatively impacts your credit score slightly (about 5 points). Inquiries remain on your credit report up to 2 years. There are two types of inquires. The type just described is known as a “hard” inquiry. A “soft” inquiry is when you make the inquiry yourself or when it is checked for a consumer disclosure purpose (an employer or business). A soft inquiry will not harm your credit score.

• Payments over 90 days late remain on your credit report for up to 7 years and are just as damaging to your credit score as a tax lien or judgment. A payment over 30 days late will negatively impact your credit score. However, it will not have as lasting an effect on your credit score as a payment over 90 days late unless you are consistently late.

• Public records such as a judgment or tax lien will stay on your credit report for 7 years. A bankruptcy will stay on your credit report for 10 years from the date of filing, however, a Chapter 13 may be removed after only 7 years depending on the credit reporting agency’s policy. An unpaid tax lien or defaulted student loan, however, will stay on your credit report indefinitely.

• Utilizing over 50% of a credit line will also impact your score negatively.

• The length of time and number of accounts open also carries weight. The more accounts you have open over many years, the higher your credit score will be because you have “proven” your credit worthiness.

Not all accounts you have are reported to these bureaus. Doctor bills, utility bills, etc. are generally not reported unless they are delinquent. The bureaus do not maintain a history of your checking account information.

Knowing what information is reported, how it impacts the credit score, and how long it should stay on your credit report is the first step in repairing and maintaining a high credit score. The higher your credit score, the cheaper and easier it will be for you to borrow money.

Sources

http://www.truecredit.com

http://www.ftc.gov

http://www.credit.com/