Credit

What is a credit report?

Your credit payment history is recorded in a file or report.  Consumer Reporting Agencies (aka CRAs) maintain and sell these files and reports.  One type of CRA is commonly known as a credit bureau.  You have a credit record on file at a credit bureau if you have ever applied for a credit.  This would of course include a charge account, a personal loan, insurance, or a job.  Your credit record contains information about your income, debts, and credit payment history.  It also indicates whether you have any public records.  This includes any lawsuits, liens, judgments, or if you have filed for bankruptcy.

Do I have a right to know what’s in my report?

Yes, if you ask for it.  The CRA must tell you everything in your report.  This would include medical information, and in most cases, the sources of the information.  The CRA also must give you a list of everyone who has requested your report within the past 2 years.  This would also include information for employment related requests.

What type of information do credit bureaus collect and sell?

Credit bureaus collect and sell four basic types of information:

Identification and employment information

Routinely note are your name, birth date, social security number, employer, and spouse’s name.  The CRA also may provide information about your employment history, home ownership, income, and previous address.  That is, if a creditor requests this type of information.

Payment history

Different creditors list your accounts.  They show how much credit has been extended and whether you’ve paid on time.  Related events, such as referral of an overdue account to a collection agency, may also be noted.

Inquiries

CRAs must maintain a record of all creditors who have asked for your credit history within the past 2 years.  Also, records of those persons or businesses requesting your credit history for employment purposes show for the past two years.

Public record information

There are events that are a matter of public record.  Bankruptcies, foreclosures, and tax liens may appear in your report as well.

What is credit scoring?

Credit scoring is a system creditors use to help determine whether to offer you credit.  Information about you and your credit experiences, such as your bill-paying history show on your report.  Further information includes the number and type of accounts you have, late payments, collection actions, outstanding debt, and the age of your accounts.  This is all collected from your credit application and your credit report.  Using a statistical program, creditors compare this information to the credit performance of consumers with similar profiles.  A credit scoring system awards points for each factor that helps predict who is the most likely to repay a debt.  It also awards points for people who repay that debt in a timely and methodical fashion. 

A total number of points — a credit score — helps predict how creditworthy you are.  That is, how likely it is that you will repay a loan and make the payments when due.  Your credit report is an important part of many credit scoring systems.  Therefore, it is very important to make sure it’s accurate before you apply for a commercial loan.  To get copies of your report, contact the three major credit reporting agencies:

Equifax: (800) 685-1111
Experian (formerly TRW): (888) EXPERIAN (397-3742)
Trans Union: (800) 916-8800

These agencies may charge you $9.00, or more, for your credit report.

Why is credit scoring used?

Credit scoring is based on real data and statistics, so it usually is more reliable than subjective or judgmental methods.  It treats all applicants objectively.  This purportedly “objective” scoring method may or may not beneficial to all commercial loan applicants.  Typically, judgmental methods rely on various criterion.   These are not systematically tested and can vary when applied by different individuals.

How is a credit scoring model developed?

To develop a model, a creditor selects a random sample of its customers, or a sample of similar customers if their sample is not large enough, and analyzes it statistically to identify characteristics that relate to creditworthiness.  The CRAs assign a weight to each of these factors.  It is based on how strong a predictor it is of who would be a good credit risk.  Each creditor may use its own credit scoring model, different scoring models for different types of credit, or a generic model developed by a credit scoring company.  Under the Equal Credit Opportunity Act, a credit scoring system may not use certain characteristics like — race, sex, marital status, national origin, or religion — as factors. However, creditors are allowed to use age in properly designed scoring systems.  But any scoring system that includes age must give equal treatment to elderly applicants.

How reliable is the credit scoring system?

Credit scoring systems enable creditors to evaluate millions of applicants consistently and impartially on many different characteristics.  But to be statistically valid, credit scoring systems must be based on a large enough sample.  Remember that these systems generally vary from creditor to creditor.  Although you may think such a system is arbitrary or impersonal, it can help make decisions faster, more accurately.  It is more impartial than individuals, that is, when it is properly designed.  And many creditors design their systems so that in marginal cases, applicants whose scores are not high enough to pass easily or are low enough to fail absolutely are referred to a credit manager who decides whether the company or lender will extend credit.  This may allow for discussion and negotiation between the credit manager and the commercial loan applicant.

What can I do to improve my credit score?

Credit scoring models are complex and often vary among creditors and for different types of credit.  If one factor changes, your score may change — but improvement generally depends on how that factor relates to other factors considered by the model.  Nevertheless, scoring models generally evaluate the following types of information in your credit report:

Have you paid your bills on time? 

Payment history typically is a significant factor.  It is likely that your score will be affected negatively if you have paid bills late, had an account referred to collections, or declared bankruptcy, if that history is reflected on your credit report.

What is your outstanding debt? 

Many scoring models evaluate the amount of debt you have compared to your credit limits.  If the amount you owe is close to your credit limit, that is likely to have a negative effect on your score.

How long is your credit history

Generally, models consider the length of your credit track record.  An insufficient credit history may have an effect on your score, but that can be offset by other factors, such as timely payments and low balances.

Have you applied for new credit recently

Many scoring models consider whether you have applied for credit recently by looking at “inquiries” on your credit report when you apply for credit.  If you have recently applied for numerous new accounts, that may negatively affect your score.  However, not all inquiries are counted. Inquiries by creditors who are monitoring your account or looking at credit reports to make “prescreened” credit offers are not counted.

How many and what types of credit accounts do you have? 

Although it is generally good to have established credit accounts, too many credit card accounts may have a negative effect on your score.  In addition, many models consider the type of credit accounts you have.  For example, under some scoring models, loans from finance companies may negatively affect your credit score.

Scoring models may be based on more than just information in your credit report.  For example, the model may consider information from your credit application as well: your job or occupation, length of employment, or whether you own a primary residence.

To improve your credit score under most models, concentrate on paying your bills on time, paying down outstanding balances, and not taking on new debt.  It’s likely to take some time to improve your score significantly.

What happens if you are denied credit or don’t get the terms you want?

The Equal Credit Opportunity Act requires creditors to give you a notice that tells you the specific reasons your application was rejected.  You have the right to learn the reasons of your rejection, if you ask within 60 days.  Indefinite and vague reasons for denial are illegal, so ask the creditor to be specific.  Acceptable reasons include: “Your income was low” or “You haven’t been employed long enough.”  Unacceptable reasons include: “You didn’t meet our minimum standards” or “You didn’t receive enough points on our credit scoring system.” 

If a creditor says you were denied credit because you are too near your credit limits on your charge cards or you have too many credit card accounts, you may want to reapply after paying down your balances or closing some accounts.  Though sometimes closing accounts may have a derogatory effect on your credit score. Credit scoring systems consider updated information and change over time.

What is the Fair Credit Reporting Act (FCRA)?

Sometimes you can be denied credit because of information from a credit report.  If so, the Fair Credit Reporting Act requires the creditor to give you the name, address and phone number of the credit reporting agency that supplied the information.  You should contact that agency to find out what your report said.  Request your credit report within 60 days of being turned down for credit.  That way, it’s free.  The credit reporting agency can tell you what’s in your report, but only the creditor can tell you why your application was denied.

If you’ve been denied credit, or didn’t get the rate or credit terms you want, ask the creditor if a credit scoring system was used.  Then, ask what characteristics or factors were used in that system, and the best ways to improve your application.  If you get credit, ask the creditor whether you are getting the best rate and terms available for your commercial mortgage application and, if not, why.  Inaccurate credit information can cause lenders to offer substandard interest rates to you.  Therefore, be sure to dispute any inaccurate information in your credit report.