Posts Tagged Consumer Credit
The Truth Behind Common Myths About Your Credit Report
Jon Arnold asked:
It is truly amazing to note the number of “facts” that many people think they know about credit reports and how various factors affect your credit score that are just simply untrue. For as much importance that is placed on having as good of a credit report and credit score as possible these days, it is critical for the consumer to understand the truth behind how your credit score is affected by various things. This is especially important in today’s world, as car insurance companies and even many employers are now checking a consumer’s credit report before making a decision about their insurance premiums or making a job offer.
Myth #1: When my fiance and I get married, we will have a joint credit report and the negatives from our individual reports will go away.
Nothing could be further from the truth. Even after you are married, you will still have separate credit reports. Any new credit items added to your report will be the result of opening joint accounts or having your name added to their existing account. Any negative information that was there before will still be there.
Myth #2: As long as my credit cards are not over their credit limit, they will give me a good credit score.
Not completely true. The two worst things you can do to get a bad credit score are to consistently miss or be late with payments, and to go over your credit limit. If you make your payments on time and stay under your credit limit, you will get an “ok” rating on that credit card. But to maximize the number of points you get on your credit card towards your credit score, it is best to keep your outstanding balance at about 20-30% of your credit limit.
Myth #3: When you negotiate a settlement amount with a lender, that account will show up as being fine on your credit report.
Wrong. If you have to negotiate something, that would indicate that you are working on a deal to pay them some amount less than what you actually owe. In that case, it will definitely have a negative effect on your credit score and show up as a negative item.
Myth #4: Closing old accounts will raise your credit score.
Totally inaccurate and in fact, can very potentially have the opposite effect and lower your credit score. Remember, your credit score is a picture of your credit history, and if you close old accounts, your credit history is reduced, thereby potentially lowering your overall score.
Myth #5: The best or only way to raise your credit score is to use one of the companies that specialize in that.
This is the biggest myth and also one of the biggest pieces of hogwash. Some of those companies that claim they can fix your credit can do so to varying degrees, and some cannot do a thing. But the real truth of the matter is that none of those companies can do anything that you cannot do yourself at no charge except for postage stamps. In fact, since you are the consumer who is disputing his or her own credit report, you actually have more clout in this way than those companies do.
Myth #6: Errors on your credit report are rare, and will correct themselves automatically when they occur.
Absolute baloney. The truth of the matter is that the vast majority of consumers have errors on their credit report. Compound that with the fact that those errors do NOT correct themselves, ever, unless you point out the error and dispute it.
Your credit score and credit history are used in a wide variety of places and the use of them is increasing every day. It is definitely worth your time and effort to get copies of your credit report and ensure that it is accurate, which is a huge step towards raising your credit score.
Alice
It is truly amazing to note the number of “facts” that many people think they know about credit reports and how various factors affect your credit score that are just simply untrue. For as much importance that is placed on having as good of a credit report and credit score as possible these days, it is critical for the consumer to understand the truth behind how your credit score is affected by various things. This is especially important in today’s world, as car insurance companies and even many employers are now checking a consumer’s credit report before making a decision about their insurance premiums or making a job offer.
Myth #1: When my fiance and I get married, we will have a joint credit report and the negatives from our individual reports will go away.
Nothing could be further from the truth. Even after you are married, you will still have separate credit reports. Any new credit items added to your report will be the result of opening joint accounts or having your name added to their existing account. Any negative information that was there before will still be there.
Myth #2: As long as my credit cards are not over their credit limit, they will give me a good credit score.
Not completely true. The two worst things you can do to get a bad credit score are to consistently miss or be late with payments, and to go over your credit limit. If you make your payments on time and stay under your credit limit, you will get an “ok” rating on that credit card. But to maximize the number of points you get on your credit card towards your credit score, it is best to keep your outstanding balance at about 20-30% of your credit limit.
Myth #3: When you negotiate a settlement amount with a lender, that account will show up as being fine on your credit report.
Wrong. If you have to negotiate something, that would indicate that you are working on a deal to pay them some amount less than what you actually owe. In that case, it will definitely have a negative effect on your credit score and show up as a negative item.
Myth #4: Closing old accounts will raise your credit score.
Totally inaccurate and in fact, can very potentially have the opposite effect and lower your credit score. Remember, your credit score is a picture of your credit history, and if you close old accounts, your credit history is reduced, thereby potentially lowering your overall score.
Myth #5: The best or only way to raise your credit score is to use one of the companies that specialize in that.
This is the biggest myth and also one of the biggest pieces of hogwash. Some of those companies that claim they can fix your credit can do so to varying degrees, and some cannot do a thing. But the real truth of the matter is that none of those companies can do anything that you cannot do yourself at no charge except for postage stamps. In fact, since you are the consumer who is disputing his or her own credit report, you actually have more clout in this way than those companies do.
Myth #6: Errors on your credit report are rare, and will correct themselves automatically when they occur.
Absolute baloney. The truth of the matter is that the vast majority of consumers have errors on their credit report. Compound that with the fact that those errors do NOT correct themselves, ever, unless you point out the error and dispute it.
Your credit score and credit history are used in a wide variety of places and the use of them is increasing every day. It is definitely worth your time and effort to get copies of your credit report and ensure that it is accurate, which is a huge step towards raising your credit score.
Alice
How To Write Letters To Remove Information Off Your Credit Report
Tim Gorman asked:
Many people who look into their reports find that their credit information has errors and those errors usually affect your credit negatively.
Maintaining an accurate score sometimes requires us to be pro-active, and we must write letters to remove information off our credit report. These are sent to the big 3 credit bureaus. Although in many cases the first thing most people want to do is to call the Credit Bureau and tell them off, this would be counterproductive. Instead the best method would be to sit down and write a credit report dispute letter.
You should read your credit report, take notes as to what you consider the problem areas are and think whether what’s on the report could actually be true. If, in finding that what’s on the report is false, you need to think through how you’re going to word your letters to remove info off credit report. You’re going to have to send a copy of this letter to each of the three main credit bureaus: TransUnion, Experian, and Equifax. Be polite and state facts as you see them. See example letter below.
Dear (credit bureau name here),
After looking at a copy of my credit file, I found that it contained erroneous information. I would like to dispute this information and request a correction. I am concerned about the information that you have put in my credit report as it could seriously impair the credit rating I enjoy with lending institutions.
You have not (state the problem here).
Be sure to include the month, and the date, and the name of the business.
I am enclosing a photocopy of my cancelled check as proof of my payment. Hopefully, this will correct the accuracy of my credit file. As you are certainly aware of, the credit bureaus are only allowed to use accurate information in a consumer’s credit file.
Thank you for correcting the above errors to insure that it doesn’t impair my personal credit. Please contact me as soon as the correction has been made and my credit report is again accurate. Please send a copy of my credit report to: (place mailing address here).
Yours,
(Your name)
Be sure to include your full name as listed in your credit report, address, Social Security number, copy of your driver’s license, copy of the credit report, and copy of your proof, i.e. cancelled check.
Be sure to retain a copy of whatever you send to each credit bureau. Make a note of the date that you mail your letters to remove info off credit report. Using certified or registered mail is a good idea, as this will give you proof of the mailing date.
Lydia
Many people who look into their reports find that their credit information has errors and those errors usually affect your credit negatively.
Maintaining an accurate score sometimes requires us to be pro-active, and we must write letters to remove information off our credit report. These are sent to the big 3 credit bureaus. Although in many cases the first thing most people want to do is to call the Credit Bureau and tell them off, this would be counterproductive. Instead the best method would be to sit down and write a credit report dispute letter.
You should read your credit report, take notes as to what you consider the problem areas are and think whether what’s on the report could actually be true. If, in finding that what’s on the report is false, you need to think through how you’re going to word your letters to remove info off credit report. You’re going to have to send a copy of this letter to each of the three main credit bureaus: TransUnion, Experian, and Equifax. Be polite and state facts as you see them. See example letter below.
Dear (credit bureau name here),
After looking at a copy of my credit file, I found that it contained erroneous information. I would like to dispute this information and request a correction. I am concerned about the information that you have put in my credit report as it could seriously impair the credit rating I enjoy with lending institutions.
You have not (state the problem here).
Be sure to include the month, and the date, and the name of the business.
I am enclosing a photocopy of my cancelled check as proof of my payment. Hopefully, this will correct the accuracy of my credit file. As you are certainly aware of, the credit bureaus are only allowed to use accurate information in a consumer’s credit file.
Thank you for correcting the above errors to insure that it doesn’t impair my personal credit. Please contact me as soon as the correction has been made and my credit report is again accurate. Please send a copy of my credit report to: (place mailing address here).
Yours,
(Your name)
Be sure to include your full name as listed in your credit report, address, Social Security number, copy of your driver’s license, copy of the credit report, and copy of your proof, i.e. cancelled check.
Be sure to retain a copy of whatever you send to each credit bureau. Make a note of the date that you mail your letters to remove info off credit report. Using certified or registered mail is a good idea, as this will give you proof of the mailing date.
Lydia
Make Good Use of Your Annual Free Credit Report
Steve Evans asked:
u can use your credit report you need to get yur report. Reports are available on request. Free credit reports requested by phone or mail will be processed within 15 days of receiving your request. Such reports were mandated by a federal law enacted in 2003. The program has all now been implemented.
AnnualCreditReport.com is reportedly the only official site where you can get a genuinely free copy of your credit report from all three reporting agencies. And if you/\’d rather order your free credit report by phone or by mail, you can do that too . AnnualCreditReport.com processes requests for free credit file disclosures (commonly called credit reports). I have been told that under the Fair and Accurate Credit Transactions Act (FACT Act) consumers can request and obtain a free credit report once every 12 months from each of the three nationwide consumer credit reporting companies.
Now once you have joined up for your credit report such as at AnnualCreditReport.com, there is an extra peril. This is that when you receive phishing spam pretending to be your report provider asking for personal information, you may think it is from your real provider asking for your details again from you for a Review” or a “verification”. The thing to remember here is that all the nationwide consumer reporting companies have pledged that they will not send you an email asking for your personal information.
If you get an email, see a pop-up ad, or get a phone call from someone claiming to be from your credit report provider – don/\’t trust them! Do not reply but delete the email, do not click on any link in the message.
Companies or individuals promising quick fixes are almost always fraudulent. The important thing to remember is that no one can have accurate information removed from the credit file. Companies still do get away with reading your report. Haven/\’t you ever received a pre-approved credit card?
Identity theft is also on the rise, now being the number one consumer complaint reported to the Federal Trade Commission. One of the first places identity theft shows up is often on your credit report.
Identity theft may show up as suspicious credit inquiries, changes of address, accounts in default, or new fraudulent accounts in your name.
Monitoring your credit report is your first line of defense in protecting your identity. I like to use the Stop Junk Mail service because I can stop all the credit card offers and other junk mail. Monitor your credit report to catch ID fraud early.
Information here should not be construed as advice and it is offered without legal responsibility or liability. It must be emphasised that you should consult a professionally qualified individual or company (such as an accountant, financial adviser or solicitor for example) should you need advice on your financial situation, as they will be able to relate their advice to your personal needs accordingly.
LUCIO
u can use your credit report you need to get yur report. Reports are available on request. Free credit reports requested by phone or mail will be processed within 15 days of receiving your request. Such reports were mandated by a federal law enacted in 2003. The program has all now been implemented.
AnnualCreditReport.com is reportedly the only official site where you can get a genuinely free copy of your credit report from all three reporting agencies. And if you/\’d rather order your free credit report by phone or by mail, you can do that too . AnnualCreditReport.com processes requests for free credit file disclosures (commonly called credit reports). I have been told that under the Fair and Accurate Credit Transactions Act (FACT Act) consumers can request and obtain a free credit report once every 12 months from each of the three nationwide consumer credit reporting companies.
Now once you have joined up for your credit report such as at AnnualCreditReport.com, there is an extra peril. This is that when you receive phishing spam pretending to be your report provider asking for personal information, you may think it is from your real provider asking for your details again from you for a Review” or a “verification”. The thing to remember here is that all the nationwide consumer reporting companies have pledged that they will not send you an email asking for your personal information.
If you get an email, see a pop-up ad, or get a phone call from someone claiming to be from your credit report provider – don/\’t trust them! Do not reply but delete the email, do not click on any link in the message.
Companies or individuals promising quick fixes are almost always fraudulent. The important thing to remember is that no one can have accurate information removed from the credit file. Companies still do get away with reading your report. Haven/\’t you ever received a pre-approved credit card?
Identity theft is also on the rise, now being the number one consumer complaint reported to the Federal Trade Commission. One of the first places identity theft shows up is often on your credit report.
Identity theft may show up as suspicious credit inquiries, changes of address, accounts in default, or new fraudulent accounts in your name.
Monitoring your credit report is your first line of defense in protecting your identity. I like to use the Stop Junk Mail service because I can stop all the credit card offers and other junk mail. Monitor your credit report to catch ID fraud early.
Information here should not be construed as advice and it is offered without legal responsibility or liability. It must be emphasised that you should consult a professionally qualified individual or company (such as an accountant, financial adviser or solicitor for example) should you need advice on your financial situation, as they will be able to relate their advice to your personal needs accordingly.
LUCIO
Glitches on Your Credit Report: How to Fix Them Right
David Siegel asked:
s world, having a bad credit report may be detrimental. Even though in most cases consumers have brought this upon themselves, in some cases the bad credit report may be caused by a glitch in the credit bureau system. As up to 25% of credit reports have a substantial error that can affect the consumer in getting credit, housing or a job. Although, some may feel helpless against the unperfected credit bureau system, that is far from the truth.
Every person should order a credit report at least once a year, it is free on annualcreditreport.com. This report should be carefully examined for mistakes and biased information. Once a mistake is found the credit bureau should be contacted through certified mail, explaining the mistake. The creditor that reported the information to the bureau should also be contacted by mail, stating the mistake that was found. The Fair Credit Report Act mandates credit bureau to delete all incorrect information that may be on the report. Therefore once the credit bureau receives your letter disputing the mistake within the report, it will investigate the glitch by contacting the creditor and trying to verify the credit report. If the creditor does not respond in time or if he does not verify the information on the original report then the bureau will delete the erroneous information from the report.
Furthermore, if your credit report displays information that you feel is biased towards you, you can add an explanatory note explaining the situation. For example, if you moved to another address while your bills kept coming to your old address, causing impairment to your credit score, you can add a note to your credit report explaining that situation. Just write a note to the bureau explaining that you would like such a note included on the report. Sometimes an easier route to fixing your credit report is by contacting the creditor that reported the problem to your credit bureau and asking them to clear up the glitch, by contacting the bureau.
No matter which approach you take to fixing your credit report you need to make sure that the mistake has been fixed by getting a subsequent credit report. Remember if the credit report gets a letter notifying them of a glitch, they have to investigate it, and if they can’t verify the original report then they have to delete the information. By taking control of your credit report, you can begin to change your financial picture.
CONRAD
s world, having a bad credit report may be detrimental. Even though in most cases consumers have brought this upon themselves, in some cases the bad credit report may be caused by a glitch in the credit bureau system. As up to 25% of credit reports have a substantial error that can affect the consumer in getting credit, housing or a job. Although, some may feel helpless against the unperfected credit bureau system, that is far from the truth.
Every person should order a credit report at least once a year, it is free on annualcreditreport.com. This report should be carefully examined for mistakes and biased information. Once a mistake is found the credit bureau should be contacted through certified mail, explaining the mistake. The creditor that reported the information to the bureau should also be contacted by mail, stating the mistake that was found. The Fair Credit Report Act mandates credit bureau to delete all incorrect information that may be on the report. Therefore once the credit bureau receives your letter disputing the mistake within the report, it will investigate the glitch by contacting the creditor and trying to verify the credit report. If the creditor does not respond in time or if he does not verify the information on the original report then the bureau will delete the erroneous information from the report.
Furthermore, if your credit report displays information that you feel is biased towards you, you can add an explanatory note explaining the situation. For example, if you moved to another address while your bills kept coming to your old address, causing impairment to your credit score, you can add a note to your credit report explaining that situation. Just write a note to the bureau explaining that you would like such a note included on the report. Sometimes an easier route to fixing your credit report is by contacting the creditor that reported the problem to your credit bureau and asking them to clear up the glitch, by contacting the bureau.
No matter which approach you take to fixing your credit report you need to make sure that the mistake has been fixed by getting a subsequent credit report. Remember if the credit report gets a letter notifying them of a glitch, they have to investigate it, and if they can’t verify the original report then they have to delete the information. By taking control of your credit report, you can begin to change your financial picture.
CONRAD
Business Credit Card Application Needs Good Credit Report
Richard Gilliland asked:
As with a personal credit card, the business credit card is a highly efficient method for obtaining, granting, and expending loans. The applicant for a business credit card needs do little more than fill out a brief application or key in a few bits of information over the Internet. In most cases, the customer is granted a line of credit, which can be accessed and expended quickly and easily each time the business credit card is used. Assuming that the customer has a good credit record, the credit limit will automatically be increased when it is reached, thereby increasing the loan amount without much effort on the part of the business credit card holder.
To qualify for a business credit card, a good credit record is necessary. In view of future credit needs such as business credit cards, small business owners should register their businesses with the major business credit bureaus such as Dun & Bradstreet (D&B) or Business Credit USA to obtain credit ratings. These business credit bureaus operate much like consumer credit bureaus. They will collect information from your existing creditors about your business, including a check on how much credit you have, the length of time your accounts have been active, and your payment record.
To complete your credit profile, the business credit bureau will also need some information on the rest of your business. This normally includes how many employees you have, how long you have been trading for, what you sales and profit performance is, and your business’ litigation history. Regardless of whether you register or not, you will probably show up on their records the moment a lender extends your business a credit line. Being proactive about it and voluntarily registering with a business credit bureau is a good idea. It offers you the opportunity to present your company in a good light and it creates a better impression of your business in general.
When the business credit card issuer receives your business credit card application, one of the very first things they do is obtain a copy of your business credit report. If your business does not score too well on the credit report, it may well scuttle your chances of getting a business credit card. Maintaining a good credit score needs to be high on the priority list of any business.
When it comes to new business, there is normally very little solid credit history to bank on. It could take anywhere from two to five years to build your business’ credit reputation. Until that happens, your business credit and personal credit will be inextricably linked to each other. When you apply for a business credit card and your business has no credit history, your own personal credit record is the dominant factor considered by the business credit card issuer.
Once you obtain this business credit card, it is good to remember that this credit will be included in your personal credit report until your business develops an adequate credit history. So the sooner you can establish the independence of your business credit card from your personal credit, the better.
Caffeinated Content
As with a personal credit card, the business credit card is a highly efficient method for obtaining, granting, and expending loans. The applicant for a business credit card needs do little more than fill out a brief application or key in a few bits of information over the Internet. In most cases, the customer is granted a line of credit, which can be accessed and expended quickly and easily each time the business credit card is used. Assuming that the customer has a good credit record, the credit limit will automatically be increased when it is reached, thereby increasing the loan amount without much effort on the part of the business credit card holder.
To qualify for a business credit card, a good credit record is necessary. In view of future credit needs such as business credit cards, small business owners should register their businesses with the major business credit bureaus such as Dun & Bradstreet (D&B) or Business Credit USA to obtain credit ratings. These business credit bureaus operate much like consumer credit bureaus. They will collect information from your existing creditors about your business, including a check on how much credit you have, the length of time your accounts have been active, and your payment record.
To complete your credit profile, the business credit bureau will also need some information on the rest of your business. This normally includes how many employees you have, how long you have been trading for, what you sales and profit performance is, and your business’ litigation history. Regardless of whether you register or not, you will probably show up on their records the moment a lender extends your business a credit line. Being proactive about it and voluntarily registering with a business credit bureau is a good idea. It offers you the opportunity to present your company in a good light and it creates a better impression of your business in general.
When the business credit card issuer receives your business credit card application, one of the very first things they do is obtain a copy of your business credit report. If your business does not score too well on the credit report, it may well scuttle your chances of getting a business credit card. Maintaining a good credit score needs to be high on the priority list of any business.
When it comes to new business, there is normally very little solid credit history to bank on. It could take anywhere from two to five years to build your business’ credit reputation. Until that happens, your business credit and personal credit will be inextricably linked to each other. When you apply for a business credit card and your business has no credit history, your own personal credit record is the dominant factor considered by the business credit card issuer.
Once you obtain this business credit card, it is good to remember that this credit will be included in your personal credit report until your business develops an adequate credit history. So the sooner you can establish the independence of your business credit card from your personal credit, the better.
Caffeinated Content
Report Card for the Fair Credit Reporting Act
Stuart Hunter asked:
“It is the purpose of this title to require that consumer reporting agencies adopt reasonable procedures for meeting the needs of commerce for consumer credit, personnel, insurance, and other information in a manner which is fair and equitable to the consumer, with regard to the confidentiality, accuracy, relevancy, and proper utilization of such information in accordance with the requirements of this title.”
In the words of the U.S. Congress, the previous paragraph is the purpose of the Fair Credit Reporting Act (FCRA). In short, the Fair Credit Reporting Act is designed to help protect consumers against unfair practices within the credit reporting system.
While the mission of the FCRA was a noble one, a quick look around today’s credit society shows the results have fallen well short of expectations. What follows is how the FCRA has failed to produce a fair credit system for today’s consumers.
Detailing the Failures of the Credit Reporting System
1) Accuracy – It is well documented that credit reports contain errors but it bears repeating. Recent studies show that almost 80% of all credit reports contain factual errors such as duplicate listings, incorrect dates, tradelines placed on the wrong person’s credit reports, and omitted positive credit accounts.
These studies also indicate that 25% of credit reports containing errors significant enough to result in a credit denial.
How fair is a credit system that can cause a person to get declined for a loan or force them to pay higher interest rates than are necessary based on their actual credit risk? True, you have the right to dispute these inaccurate items with the credit bureaus, but this chore is not necessarily easy or foolproof. Depending on the nature of the erroneous items on your credit reports, credit repair can be a frustrating and time consuming ordeal that you are forced into because of no fault of your own.
2) Relevancy – While they do not say it directly, the credit bureaus’ creation of the VantageScore is evidence enough that the current FICO based credit scoring models are not as relevant as they could be. According to Experian spokesman Donald Girard, the VantageScore is “the most sophisticated, highly predictive scoring model that’s available in the marketplace” and as a consequence the much more popular FICO score is less predictive.
One of the flaws in the FICO score that the VantageScore tried to fix is the impact that very old credit accounts have on the credit score. According to Dr. Bonnie Guiton Hill, advisor to President Bush on consumer affairs, “it is our understanding that computer models that predict credit worthiness find most information that is more than two years old nonessential.” This is why newly created scoring models like the VantageScore are beginning to ignore credit information that is over three years old. It does not serve to accurately determine your credit risk.
So why have lenders been so slow to adopt scoring models such as the VantageScore? They claim it is because FICO is ingrained in the current credit system and has stood the test of time. A more cynical answer is that these lenders are not willing to sacrifice the huge profits they make from charging higher interest rates on loans granted to people who are a relatively low credit risk.
Of course, this cynicism is not simply the result of a general and unfounded grudge. It is born from the observation that seemingly every quirk and inconsistency in the credit reporting system falls in favor of the lenders. For example, when looked at logically, it makes sense to close unused credit cards. Not too long ago, financial experts suggested people do exactly this to make your credit score look better by showing your lack of need for unsecured credit.
But now we know that closing those accounts can actually lower your credit score because FICO rewards you for having multiple accounts and a large amount of credit at your disposal. So while closing accounts seems to be the financially responsible thing to so, it is probably more than an odd coincidence that this behavior which makes you a less profitable consumer for banks and credit card companies it punished by FICO.
The same goes for paying off installment loans early and voluntarily lowering credit limits. Both of these actions seem inline with what we would expect from the ideal consumer, but neither will have a positive impact on your credit score. Early payment of installment loans, another common goal of a financially responsible consumer that diminishes the profits of lenders, is not noted on your credit reports. And contrary to what you would think, lowering credit limits would lower your credit score because as alluded to above, you are rewarded for having multiple credit accounts and lots of credit at your disposal.
But by another quirk of the FICO credit scoring model, you are rewarded for having multiple credit accounts, but you are punished for seeking new credit. Consumers are told that inquiries are added to your credit reports each time you apply for credit so other lenders can see that you may be overextending yourself or crashing. But isn’t it convenient that inquiries will lower your credit score at the exact time when you are looking to qualify for new lines of credit? FICO wants you to have multiple lines of credit, but in trying to appease the scoring model, you will temporarily lower your credit score allowing lenders to charge you higher interest rates.
It seems no matter what you do, the deck is stacked against the consumer.
So while the VantageScore is a step in the right direction, it is still a long way from producing truly relevant results. This is because the VantageScore maintains many of the same scoring quirks exhibited by FICO and still uses the same basic, and very limited, variables for determining your credit score such as payment history, amounts owed, and length of credit history.
Your credit score is found by taking these variables as recorded in your credit reports, plugging them into a predictive model, and calculating a single three digit number. A late payment for example will be entered into the formula and will lower your credit score a set amount based on the amount of time it was late and how long ago the late payment was reported.
The fundamental flaw in this model, however, is that there is no accounting for why the payment was late. Whether you were late in making a payments because the lender did not send you a bill, because the bills were sent to the wrong address, because you wrote the wrong amount on the check, because your checks bounced, or because you blew all your money on illegal drugs; it is all the same in the eyes of the credit scoring model. Even if you have a sloppy lender to blame for your late payments, your credit worthiness in the eyes of lenders will be the same as a person saddled with a serious drug addiction.
3) Proper Utilization – Given how common it is for a credit score to be a gross misrepresentation of a person’s credit worthiness, it could be argued that the pervasiveness of credit scores in the financial market is improper. But in today’s society, the use of credit scores goes well beyond determining loan amounts and interest rates.
Employers, landlords, insurance companies and others may request to see your credit score. In today’s society your ability to get a certain job, rent an apartment, or qualify for reasonable insurance premium can all be dependent on your credit score.
Improper is a subjective term, but being passed over for a job because of completely irrelevant and possibly inaccurate negative credit items in your credit reports that are plugged into a flawed credit scoring model to produce a credit score that is not indicative of your actual credit worthiness fits the bill.
The FCRA Made Improvements, but there is Still a Long Way to Go
The FCRA’s failure to produce a system where the “accuracy, relevancy, and proper utilization” of your information is protected has resulted in a credit reporting system that is hardly “fair and equitable” to you as a consumer. But in defense of Congress, the FCRA has been heavily influenced by deep-pocketed industry lobbyists. In fact, when the FCRA was originally passed in 1971, Senator William Proxmire, one of the bills primary sponsors, felt defeated at what had become of his original intentions for the bill.
Since that time, the FCRA has been amended to become more and more consumer friendly, but there is still a ways to go and as was the case in 1971, those in the credit industry are still keenly interested in maintaining the status quo.
While the credit bureaus are no longer able to record information about you such as your ethnicity and religion, they also are not required to collect other personal information that is relevant to your credit worthiness. If you are a model citizen who has worked with the same company for 10 years, has a perfect criminal record and makes more than enough money to cover your expenses, it is fairly obvious that you are more worthy of credit than a career criminal who is a continual burden on the system. But none of this information is recorded by the credit bureaus or used when calculating your credit score. If you and the career criminal have the same types of accounts on your credit reports, your credit scores will be the same.
Also, while you now have the ability to see what information is contained within your credit reports, you do not have the ability to learn any more than the very basics of how this information is used to formulate your credit score. What impact will paying off a past due debt have on your credit? Which credit cards should be paid down first? What effect will shopping for a new loan have on your credit score? We have vague, observation based answers for these questions, but the exact formula is unknown and is subject to change at any time.
Finally, you have the right to dispute the questionable items in your credit reports, but you don’t have the right for this process to be easy or necessarily effective. Depending on your unique situation, credit repair can be as easy as submitting an online form or as difficult as tracking down creditors, fighting with collections agencies, and possibly involving legal intervention. The very entities who profit most from inaccurate credit reporting are the ones who played such a big role in watering down the FCRA and continue to resist consumer attempts to add equity to the credit system. It is these entities you are forced to contend with when working to enforce your right to a fair and accurate credit report.
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“It is the purpose of this title to require that consumer reporting agencies adopt reasonable procedures for meeting the needs of commerce for consumer credit, personnel, insurance, and other information in a manner which is fair and equitable to the consumer, with regard to the confidentiality, accuracy, relevancy, and proper utilization of such information in accordance with the requirements of this title.”
In the words of the U.S. Congress, the previous paragraph is the purpose of the Fair Credit Reporting Act (FCRA). In short, the Fair Credit Reporting Act is designed to help protect consumers against unfair practices within the credit reporting system.
While the mission of the FCRA was a noble one, a quick look around today’s credit society shows the results have fallen well short of expectations. What follows is how the FCRA has failed to produce a fair credit system for today’s consumers.
Detailing the Failures of the Credit Reporting System
1) Accuracy – It is well documented that credit reports contain errors but it bears repeating. Recent studies show that almost 80% of all credit reports contain factual errors such as duplicate listings, incorrect dates, tradelines placed on the wrong person’s credit reports, and omitted positive credit accounts.
These studies also indicate that 25% of credit reports containing errors significant enough to result in a credit denial.
How fair is a credit system that can cause a person to get declined for a loan or force them to pay higher interest rates than are necessary based on their actual credit risk? True, you have the right to dispute these inaccurate items with the credit bureaus, but this chore is not necessarily easy or foolproof. Depending on the nature of the erroneous items on your credit reports, credit repair can be a frustrating and time consuming ordeal that you are forced into because of no fault of your own.
2) Relevancy – While they do not say it directly, the credit bureaus’ creation of the VantageScore is evidence enough that the current FICO based credit scoring models are not as relevant as they could be. According to Experian spokesman Donald Girard, the VantageScore is “the most sophisticated, highly predictive scoring model that’s available in the marketplace” and as a consequence the much more popular FICO score is less predictive.
One of the flaws in the FICO score that the VantageScore tried to fix is the impact that very old credit accounts have on the credit score. According to Dr. Bonnie Guiton Hill, advisor to President Bush on consumer affairs, “it is our understanding that computer models that predict credit worthiness find most information that is more than two years old nonessential.” This is why newly created scoring models like the VantageScore are beginning to ignore credit information that is over three years old. It does not serve to accurately determine your credit risk.
So why have lenders been so slow to adopt scoring models such as the VantageScore? They claim it is because FICO is ingrained in the current credit system and has stood the test of time. A more cynical answer is that these lenders are not willing to sacrifice the huge profits they make from charging higher interest rates on loans granted to people who are a relatively low credit risk.
Of course, this cynicism is not simply the result of a general and unfounded grudge. It is born from the observation that seemingly every quirk and inconsistency in the credit reporting system falls in favor of the lenders. For example, when looked at logically, it makes sense to close unused credit cards. Not too long ago, financial experts suggested people do exactly this to make your credit score look better by showing your lack of need for unsecured credit.
But now we know that closing those accounts can actually lower your credit score because FICO rewards you for having multiple accounts and a large amount of credit at your disposal. So while closing accounts seems to be the financially responsible thing to so, it is probably more than an odd coincidence that this behavior which makes you a less profitable consumer for banks and credit card companies it punished by FICO.
The same goes for paying off installment loans early and voluntarily lowering credit limits. Both of these actions seem inline with what we would expect from the ideal consumer, but neither will have a positive impact on your credit score. Early payment of installment loans, another common goal of a financially responsible consumer that diminishes the profits of lenders, is not noted on your credit reports. And contrary to what you would think, lowering credit limits would lower your credit score because as alluded to above, you are rewarded for having multiple credit accounts and lots of credit at your disposal.
But by another quirk of the FICO credit scoring model, you are rewarded for having multiple credit accounts, but you are punished for seeking new credit. Consumers are told that inquiries are added to your credit reports each time you apply for credit so other lenders can see that you may be overextending yourself or crashing. But isn’t it convenient that inquiries will lower your credit score at the exact time when you are looking to qualify for new lines of credit? FICO wants you to have multiple lines of credit, but in trying to appease the scoring model, you will temporarily lower your credit score allowing lenders to charge you higher interest rates.
It seems no matter what you do, the deck is stacked against the consumer.
So while the VantageScore is a step in the right direction, it is still a long way from producing truly relevant results. This is because the VantageScore maintains many of the same scoring quirks exhibited by FICO and still uses the same basic, and very limited, variables for determining your credit score such as payment history, amounts owed, and length of credit history.
Your credit score is found by taking these variables as recorded in your credit reports, plugging them into a predictive model, and calculating a single three digit number. A late payment for example will be entered into the formula and will lower your credit score a set amount based on the amount of time it was late and how long ago the late payment was reported.
The fundamental flaw in this model, however, is that there is no accounting for why the payment was late. Whether you were late in making a payments because the lender did not send you a bill, because the bills were sent to the wrong address, because you wrote the wrong amount on the check, because your checks bounced, or because you blew all your money on illegal drugs; it is all the same in the eyes of the credit scoring model. Even if you have a sloppy lender to blame for your late payments, your credit worthiness in the eyes of lenders will be the same as a person saddled with a serious drug addiction.
3) Proper Utilization – Given how common it is for a credit score to be a gross misrepresentation of a person’s credit worthiness, it could be argued that the pervasiveness of credit scores in the financial market is improper. But in today’s society, the use of credit scores goes well beyond determining loan amounts and interest rates.
Employers, landlords, insurance companies and others may request to see your credit score. In today’s society your ability to get a certain job, rent an apartment, or qualify for reasonable insurance premium can all be dependent on your credit score.
Improper is a subjective term, but being passed over for a job because of completely irrelevant and possibly inaccurate negative credit items in your credit reports that are plugged into a flawed credit scoring model to produce a credit score that is not indicative of your actual credit worthiness fits the bill.
The FCRA Made Improvements, but there is Still a Long Way to Go
The FCRA’s failure to produce a system where the “accuracy, relevancy, and proper utilization” of your information is protected has resulted in a credit reporting system that is hardly “fair and equitable” to you as a consumer. But in defense of Congress, the FCRA has been heavily influenced by deep-pocketed industry lobbyists. In fact, when the FCRA was originally passed in 1971, Senator William Proxmire, one of the bills primary sponsors, felt defeated at what had become of his original intentions for the bill.
Since that time, the FCRA has been amended to become more and more consumer friendly, but there is still a ways to go and as was the case in 1971, those in the credit industry are still keenly interested in maintaining the status quo.
While the credit bureaus are no longer able to record information about you such as your ethnicity and religion, they also are not required to collect other personal information that is relevant to your credit worthiness. If you are a model citizen who has worked with the same company for 10 years, has a perfect criminal record and makes more than enough money to cover your expenses, it is fairly obvious that you are more worthy of credit than a career criminal who is a continual burden on the system. But none of this information is recorded by the credit bureaus or used when calculating your credit score. If you and the career criminal have the same types of accounts on your credit reports, your credit scores will be the same.
Also, while you now have the ability to see what information is contained within your credit reports, you do not have the ability to learn any more than the very basics of how this information is used to formulate your credit score. What impact will paying off a past due debt have on your credit? Which credit cards should be paid down first? What effect will shopping for a new loan have on your credit score? We have vague, observation based answers for these questions, but the exact formula is unknown and is subject to change at any time.
Finally, you have the right to dispute the questionable items in your credit reports, but you don’t have the right for this process to be easy or necessarily effective. Depending on your unique situation, credit repair can be as easy as submitting an online form or as difficult as tracking down creditors, fighting with collections agencies, and possibly involving legal intervention. The very entities who profit most from inaccurate credit reporting are the ones who played such a big role in watering down the FCRA and continue to resist consumer attempts to add equity to the credit system. It is these entities you are forced to contend with when working to enforce your right to a fair and accurate credit report.
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