Now that 2015 has arrived, it’s a great time to plan out the year ahead. Not just related to vacations, education, and holidays, but from a financial perspective as well, due in no small part to the fast-approaching tax season. And one key, but often-overlooked, part of financial planning is related to credit reports.
Did you know that, based on a 2013 FindLaw.com survey, almost 1 out of every 4 Americans has never checked their credit report? This is a staggering statistic, considering the huge impact the information found in your report can have on your finances—not to mention on your quality of life as well.
So with the new year, we here at HighYa felt it would be a good idea to help you start things off right by talking in-depth about credit reports, including what they are, how they affect your financial wellbeing, how you can avoid credit report scams, and much more.
With this said, let’s start with the basics and learn more about what a credit report is.
What Is a Credit Report?
According to the Consumer Financial Protection Bureau (CFPB), a credit report contains information about your credit, some of your bill repayment history, and the status of your credit accounts, including “how often you make your payments on time, how much credit you have available, how much credit you are using, and whether a debt or bill collector is collecting on money you owe. It also can contain public records such as liens, judgments, and bankruptcies that provide insight into your financial status and obligations.”
This information is then compiled and processed into a credit score, which is “a three-digit number generated by a mathematical algorithm using information in your credit report.” 9 out of 10 times this number is calculated by FICO (Fair Isaac Corporation), an independent company who has developed a complex algorithm to evaluate information found in credit reports, who then assigns them a number, which can range between 300 and 850:
- 720-850: Excellent
- 690-719: Good
- 630-689: Fair/Average
- Under 630: Bad/Poor
Because the information contained in your credit report directly impacts your score, which in turn impacts how much banks are willing to lend you (as well as your interest rate and other repayment terms), it’s important that you remain informed, which is what we’ll talk about next.
Why Is It Important to Check Your Credit Report?
When it comes down to it, your credit report is one of the most important components of your overall financial wellness, so it’s extremely important that you know exactly what it contains and what things to look for that could result in a lower score than you deserve. Common minor credit report errors include showing open accounts that have previously been closed, displaying incorrect balances on existing accounts, and even showing credit information for another individual, which is especially prevalent among family members with similar names (e.g. John Jones Sr. and John Jones Jr.).
Think credit report errors can’t happen to you? Well, according to a 2013 Federal Trade Commission study conducted over the course of 8 years, “one in five consumers had an error on at least one of their three credit reports” and “five percent of consumers had errors on one of their three major credit reports that could lead to them paying more for products such as auto loans and insurance.” And identifying these credit report errors “typically results in credit scores going up 20 to 30 points, but corrections can lead to a score increase of up to 100 points or more if the error was a bankruptcy report.”
In other words, about 20 percent of the US population has one or more errors in their credit report, and these errors could cause your credit score to be a full tier lower than what it should be. Because of this, it’s extremely important that you check yours on a regular basis (we’ll talk more about this in a moment).
In addition to catching errors, regularly checking your credit report is one of the primary methods of uncovering identity theft, which includes having loans and other types of credit opened in your name. And while recovering from any level of ID fraud can be a frustrating process, catching it as early as possible can make it that much easier for you.
What Are Your Rights Regarding Credit Reports?
In order to help consumers remain informed about their credit score, the Fair Credit Reporting Act (FCRA) outlines 8 primary rights you have when it comes to your credit reports:
- You must be told if the information in your file has been used against you, including denying your application for credit, insurance, or employment. This includes the name, address, and phone number of the agency that provided the information.
- You have the right to know what’s in your file (also known as “file disclosure). While this certainly includes your free annual credit report, you’re also entitled to a free credit report any time adverse action has been taken against you based on information found in your file, if you’re the victim of ID fraud, if your file contains inaccurate information, if you’re on public assistance, or if you’re unemployed and plan to apply for unemployment within the next 60 days.
- You have the right to ask for a credit score. However, unless you’re requesting one of your free annual reports (more about this in the next section), you may be required to pay for it.
- You have the right to dispute incomplete, inaccurate, or unverifiable information, and consumer reporting agencies must delete this information after your request. However, reporting agencies also have the right to investigate your dispute, and can maintain existing information they’ve verified to be accurate.
- Negative information has an expiration date. In other words, reporting agencies may not include negative information that’s more than 7 years old, other than bankruptcies, which can be reported for up to 10 years.
- Only those with a valid need (e.g. creditor, insurer, employer, landlord, or other business) may access the information contained in your credit report.
- Although these entities can access your credit report, they must first have consent from you.
- If an entity violates any of your rights outlined in the FCRA, you have certain recourse.
Now that you know more about your credit reporting rights, how do you go about obtain your credit report in the first place? Let’s take a look.
How Do You Access Your Credit Report? What Types of Information Does it Contain?
Earlier in the article, we learned that FICO provides a numerical value based on the information found in your credit report (known as a credit score), but did you know that there are 3 different companies that provide this information in the first place? It’s true. These companies (also known as bureaus) include Experian, Equifax, and TransUnion, and each can include different pieces of information that can lead to three different credit scores for the same individual.
Because of this, the FCRA provides consumers with the ability to obtain one free credit report per calendar year from each of the above bureaus. Perhaps the easiest way to accomplish this is by using the government website AnnualCreditReport.com. Note: While you can order your credit report from all 3 agencies at the same time, one cool trick we learned from CreditCardSmarts is to request a report from one of the bureaus every 4 months, which gives you the ability to monitor your credit report over the course of a year at no charge, instead of all at once.
So which types of activity can negatively impact your score, and which types can improve it? According to MyFico.com, 35% of your credit score is related to your repayment history, and another 30% relates to the amount of debt you currently hold. Ultimately, this means that well over half of your score is related only to how much debt you have and how well you repay it.
How a FICO Score breaks down (image credit: myfico.com)
With this in mind, About Money claims that the following activity is the most harmful to your credit score:
- Paying late
- Not paying at all
- Having an account charged off
- Having an account sent to collections
- Defaulting on a loan
- Filing bankruptcy
- Having your home foreclosed
- Having a judgment filed against you
- High credit card balances
- All your credit cards are maxed out
- Closing credit cards that still maintain balances
- Closing old credit cards (this affects your length of credit history)
- Closing cards with available credit
Keep in mind that there are hundreds of independent companies that offer access to your credit report, and not all of them are created equal, which is what we’ll discuss next.
Things to Watch Out for When Ordering Your Credit Report
When it comes down to it, if you’re simply looking to keep close tabs on the information that appears on your credit report, it’s hard to go wrong with AnnualCreditReport.com. This no-frills service is operated by the US government, so you’ll never have to worry about being charged or being enrolled for any type of credit monitoring or other services that you may not have any use for.
Outside of this though, you have dozens (if not hundreds) of companies to choose from when it comes to ordering your credit reports, including popular options such as FreeCreditReport.com, CreditKarma.com, and many others. However, keep in mind that many of these businesses may charge a fee for your order (despite including the word “free” in their name), and may also enroll you in a monthly credit monitoring service that can quickly add up if you don’t know you’re being charged.
In addition, there are a wide variety of scammers out there, constantly preying on individuals who are looking to obtain copies of their credit report. Because of this, Scambusters recommends the following to avoid paying money for your credit report, or falling victim to a scam:
- As we’ve discussed many times, you should never open an email from anyone you don’t know, even if they’re offering you a free credit report. And if you do, never click on any links it contains.
- Browsing for “free credit reports” using your favorite search engine can reveal hundreds of results, although many of these may not offer free reports (as mentioned above), while some could be outright scams.
- Never hand over your credit card information to a website promising a “free” credit report. After all, if it was free, why do they need your credit card?
- Similarly, don’t be enticed to buy something in order to receive a credit report.
- Never click on an online advertisement (whether a pop-up or anything else) for a free credit report.
Given all this, what if you order you credit report through AnnualCreditReport.com and find errors? What can you do to correct them?
What Can You Do if You Find Errors On Your Credit Report?
According to the Federal Trade Commission, disputing information found on your credit report is a 2-step process:
First, you’ll need to contact the credit reporting company in writing (a sample dispute letter can be found here) outlining which information is inaccurate, why it’s inaccurate, including any documents that support your position. You should send your letter via certified mail with a return receipt, and the company will have 30 days to provide a response, unless your request is deemed frivolous. From there, an investigation may ensue, which could require more input from you.
Similar to step one, you’ll need to send a second letter to the company that provided the information to the reporting company (e.g. a bank or credit card company). Once again, as with the first letter you sent, you’ll need to specifically outline each item you’re disputing, why you’re disputing it, and provide any supporting documentation. Be sure to send this letter certified with a return receipt as well.
With this said, MyFico claims that each reporting company has their own dispute processes, so while the above information may be generally good, you might need to follow a slightly different path depending on the bureau you’re dealing with.
On the other hand, if you’ve discovered traces of ID theft in your credit report, the first thing you’ll need to do is contact the credit reporting bureaus and put a fraud alert in place, which will prevent criminals from opening any new accounts in your name. In addition, you’ll also need to file a similar, but separate, Identity Theft Report. Finally, in order to help the FTC identify patterns, you’ll also want to file a complaint.
Want to Help Others Learn More About Credit Reports?
Here at HighYa, we’re passionate about all things consumer-related, but especially about making you and your loved ones more informed. However, we can’t do it alone, which is where you come in.
Do you know someone who could benefit from the information contained in this article? Of course you do! So go ahead and share it far and wide, and help others avoid scams as well!