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Credit Reporting and Consumer Credit Scoring FAQ
by Paul N. Ellinger and Angela C. Lyons
University of Illinois at Urbana Champaign
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- What is a credit reporting agency?
- What is included on a credit report?
- How can I get access to my credit report?
- How can I get access to my credit score?
- What rights do I have if a lender has rejected my application based on my credit report
and score?
- What rights do I have if an insurance agent rejected my policy based on information from
a credit report?
- Who is responsible for identifying and correcting errors on your credit report?
- What can I do if I find incorrect information in my credit report?
- Who can access my credit report and under what conditions can a credit report be used?
- Does a lender use a credit report and score for my agricultural or small business loan?
- Are all of the credit reports from each of the 3 national credit reporting agencies the same?
- Will the scores from each of the credit reporting agencies be the same?
- Will my spouse have the same credit report and score as me?
- What are the major factors that go into a credit score?
- Are lenders required to report information to a credit reporting agency?
- Closing old credit cards will help my credit score.
- How long is credit information kept at the credit reporting agencies?
- Will co-signing or applying jointly for a credit application impact my credit report and score?
- What is the range of potential credit scores?
- Will my score impact my interest rate on my loan?
- Is it true that my credit information can impact premiums for auto and home insurance?
- Is my credit score related to my overall wealth position?
- Where can I find additional information?
- What is a credit reporting agency?
A credit reporting agency (CRA) is a clearinghouse for consumer credit
history information. A CRA is not a government entity. Credit and information
providers give the CRA information on how their customers pay their bills. The
CRA assembles the information along with public information into a customer-
specific file. The credit and information providers can access credit reports
and receive information about consumers
The three major credit reporting agencies are
n TransUnion (www.transunion.com) 1-800-888-4213
n Equifax (www.equifax.com) 1-800-685-1111
n Experian (www.experian.com) 1-888-397-3742
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- What is included on a credit report?
The information stored in the credit files consist of four major components: (1) personal information -- current and past addresses, phone numbers, employers, and date of birth; (2) credit information and payment history for all consumer credit accounts like auto financing, installment loans, department cards, credit cards, and home mortgages; (3) public information on bankruptcy filings, tax liens, foreclosures, wage attachments, etc.; and (4) a list of firms that have accessed your credit report in the past two years.
Items that are NOT included in the credit files are information and balances on deposit accounts, salary or wage levels, income taxes, land and machinery values, and medical records. Your race, color, religion, national origin, and marital status are NOT included. Moreover, information on agricultural or business loans is typically not reported.
View sample Experian Credit Report
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- How can I get access to my credit report?
Since credit data are being used frequently, new regulations have passed that allow easier access to your information.
As of June 1, 2005, all residents except those residing in the eastern states and U.S. territories can access free credit reports through a central web site http://www.AnnualCreditReport.com,
a toll free number 877-322-8228 (877-FACT ACT),
or a written request sent to
Annual Credit Report Request Service
P.O. Box 105281
Atlanta, GA 30348-5281.
You are entitled to one free report annually from each of the three major credit reporting agencies. Eligibility in the eastern states and U.S. territories will occur September 1, 2005.
Be careful since many imposter web sites have been reported.
You can also purchase your credit report at the three major credit reporting agencies:
The three major credit reporting agencies are
n TransUnion (www.transunion.com)
n Equifax (www.equifax.com)
n Experian (www.experian.com)
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- How can I get access to my credit score?
Your credit score can be purchased for an additional fee at the time you access your free credit report. The fee ranges from $5 to 7. This is a wise investment since you are also given the factors that are most important to improving your specific score.
You can also purchase your score at any time through each of the three major credit reporting agencies:
Free Credit Score Range Estimator
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- What rights do I have if a lender has rejected my application based on my credit report and score?
If your application is denied, you have the right to the name, address and phone number of the consumer reporting agency used by the lender (Fair Credit Reporting Act)
You also have a right to a free credit report if an lender has denied your application.
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- What rights do I have if an insurance agent rejected my policy based on information from a credit report?
If your application is denied, you have the right to the name, address, and phone number of the consumer reporting agency used by the insurance agency. (Fair Credit Reporting Act).
You also have a right to a free credit report if an insurance agency has denied your application.
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- Who is responsible for identifying and correcting errors on your credit report?
You are responsible for identifying and initiating the dispute process with a credit reporting agency even when the error is clearly not your fault. It is good business practice to check your credit report periodically for accuracy and correct items that are erroneous.
Additional information on disputing an item
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- What can I do if I find incorrect information in my credit report?
You must file a dispute with the major credit reporting agency (CRA) that has the incorrect information. You must file a dispute with the CRA including your complete name, address and the facts regarding the dispute or errors. Each of the three major credit reporting agencies has the capability to receive disputes online or by letter. You should make copies (NOT originals) of the materials in question and send your letter and accompanying materials by certified mail.
The CRAs will investigate the dispute and usually respond within 30 days.
The CRA is obliged to correct erroneous information and the institution that supplied the erroneous information must notify all nationwide CRAs so they will correct the information as well.
If you request, the CRA must also send notices to anyone who received your report in the past 6 months. If used for employment purposes, the corrected report can be sent to anyone receiving the report over the past 2 years.
Additional information on disputing an item
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- Who can access my credit report and under what conditions can a credit report be used?
Under the Fair Credit Reporting Act (FCRA), a credit report may be obtained only under the following conditions:
- Authorization of the consumer in writing
- A “legitimate” business need in connection with a business transaction initiated by a consumer
- A consumer applies for credit
- Reviewing or collection of a consumer's account
- Prescreening offers of credit
- Employment purposes, including hiring and promotion decisions, when the consumer has given written permission
- Underwriting insurance when a consumer has applied
- Investor or securities firms where a consumer has applied that could result in a margin or credit obligation
- For use by state and local officials in connection with determination of child support payments
- A government license or other benefit when the law requires consideration of the consumer's financial responsibility
- By a court order or federal grand jury subpoena
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- Does a lender use a credit report and score for my agricultural or small business loan?
Many agricultural and small business lenders access your credit report and score. Most acquire the information to validate the level of credit balances and recent payment history. A positive credit report is an indication of good character, strong conduct, and a disciplined use of credit. Lenders view this as a signal of good managerial characteristics that are likely to be transferred to the agricultural or small business.
It is becoming more common for some lenders to use the consumer credit score as one of the key evaluation and pricing criterion for an agricultural or small business loan.
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- Are all of the credit reports from each of the 3 national credit reporting agencies the same?
The credit reports may differ across the 3 credit reporting agencies (CRA). Some institutions and information providers only report information to one of the three credit reporting agencies; thus, the information may not be the same across all of the reports.
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- Will the scores from each of the credit reporting agencies be the same?
The credit scores may differ across the 3 credit reporting agencies (CRA). Some institutions and information providers report information to only one of the three CRAs; thus, the information used in the algorithms may not be the same across all of the reports.
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- Will my spouse have the same credit report and score as me?
Credit reports are unique to an individual. Your spouse will not likely have the same credit report or score. Credit accounts and obligations with joint ownership will appear on both reports.
Divorce does not change the joint credit ownership of accounts that was established.
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- What are the major factors that go into a credit score?
Many factors go into the complex and proprietary algorithms for consumer scores. In general, the categories of factors and weights are:
A. Payment History - Were payments made on time?
Approximate weight = 35%
Some of the variables used include
- Payment information on each account
- Public record information on collections
- Details on late or missed payments
- Number of accounts with late payments
B. Amounts Owed – How much is too much?
Approximate weight = 30%
Some of the variables used include:
- The amount owed on all accounts
- The amount owed on different types of accounts (credit card, installment, mortgage)
- A balance shown on certain types of accounts (example: balances on installment loans in good standing indicates responsible borrowing)
- The number of accounts with positive balances
- How much (proportion of total) of the total credit lines are being used
- How much is still owed on installment loans vs. original balances
C. Length of Credit History – How established is the customer?
Approximate weight = 15%
Some of the variables used include:
- Age of oldest account
- Average age of all accounts
- How long specific accounts have been established
- How long has it been since the accounts have been used
D. New Credit – Is the customer taking on new debt?
Approximate weight = 10%
Some of the variables used include:
- The number of new accounts
- The length of time since the most recent time an account has been established
- The number of inquiries for credit that have been made and reported
- The length of time since credit report inquiries were last made
E. Types of Credit - Does the customer have the right mix?
Approximate weight = 10%
Some of the variables used include:
- proportion and use of different types of credit
- credit card
- installment loans
- mortgage loans
Source: Equifax
Tips on improving your score in each of these areas.
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- Are lenders required to report information to a credit reporting agency?
Lenders are not obliged to report positive or negative information to a credit reporting agency.
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- Closing old credit cards will help my credit score.
This myth is not true. In fact, it could potentially hurt your score if it is an account that establishes a long history of responsible payments. Moreover, closing an account will not make any negative information on that account go away. Closing inactive accounts that do not have a long history is more advisable.
Closing inactive accounts also reduces your overall borrowing capacity and potentially increases your utilization rate (proportion of available credit borrowed).
Myths and fallacies of credit reporting
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- How long is credit information kept at the credit reporting agencies?
In general, the negative information will be kept for 10 years.
Specifically,
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Closed or inactive accounts |
10 years |
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Derogatory accounts |
7 years |
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Public records |
7 years |
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Bankruptcies (Chapter 7, 11, and 12) |
10 years |
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Chapter 13 bankruptcy |
10 years |
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Unpaid tax liens |
15 years |
Other negative items may be reported indefinitely for loans and insurance policies in excess of $50,000.
Positive payment information may stay indefinitely in your account.
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- Will co-signing or applying jointly for a credit application impact my credit report and score?
When you co-sign or apply jointly for a credit application, you have ultimate responsibility for the account including monthly payments. If timely payments are not made on these accounts, your credit score will likely decrease.
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What is the range of potential credit scores?
The range of scores is between 300 and 850. The majority of consumers have scores between 600 and 800. A score of 720 typically gets you a loan with preferable rates.
Fair Isaac Reports the following distribution of scores and delinquency rates:
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- Will my score impact my interest rate on my loan?
Many lenders, especially mortgage and auto lenders, are now using credit scores to determine the interest rate to charge on a loan. For example, the range in interest rates on recent 60-month auto loans were from less than 5% for the strongest credit to almost 18% for the highest risks based on FICO score.
Calculator: interest rates charged on loans by credit score.
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- Is it true that my credit information can impact premiums for auto and home insurance?
Auto and home insurers are now incorporating consumer credit information into their underwriting and insurance pricing criteria. According to the Insurance Information Institute, over 90% of insurance companies utilize credit data in underwriting insurance. The rationale is simply there is a statistical relationship between an individual's credit score and insurance losses. Credit data can also be used for employment purposes, certain licenses, leases, and other legitimate reasons outlined in the Fair Credit Reporting Act.
Other information about insurance and credit reporting.
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- Is my credit score related to my overall wealth position?
There is no explicit relationship between your wealth position and your consumer credit score. No asset information is available to the credit reporting agencies. Information like money in savings accounts, stocks, bonds, autos, machinery, land, and buildings are not used to calculate the score.
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- Where can I find additional information on credit reporting and credit scoring?
Federal Trade Commission
Consumer Response Center
Room 130
600 Pennsylvania Avenue, N.W.
Washington, D.C. 20580
www.ftc.gov/credit
National Credit Reporting Agencies
n TransUnion (www.transunion.com) 1-800-888-4213
n Equifax (www.equifax.com) 1-800-685-1111
n Experian (www.experian.com) 1-888-397-3742
Fair Isaac Company www.myfico.com
Credit Score Calculator: www.bankrate.com
Insurance and credit reporting: Insurance Information Institute
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