Credit Reporting Essentials: Advice from Veteran Attorneys
Understanding how a credit report works and how it affects a family is critical in allowing families to make the right choices in dealing with their debts and other obligations. This article sets out what families in financial difficulty should know about credit reporting and their credit score. It explains what is a credit report and a credit score, at what point does non-payment affect a credit score, who sees your credit report and who does not, how to review your own credit report, suggestions to cope with a blemished credit report, and how to rebuild your credit. Far more detail on credit reporting is found in NCLC’s legal treatise, Fair Credit Reporting.
What Is a Credit Report and a Credit Score?
Your credit report is a record of how you have borrowed and repaid debts. Almost every adult American has a credit file with each of the three major national credit bureaus: Experian, Equifax, and TransUnion. Many but not all creditors report each month electronically to one or more of the credit bureaus the status of each of their accounts.
Your credit report is a record of the history and description of the status of many of your credit accounts. It has basic personal information about you—Social Security number, birth date, current and former addresses, and employers. For many of your debts, the report will list the date you opened the account, the type of account (such as real estate, credit card, or installment), whether the account is currently open or has been closed, the monthly payment, the maximum credit limit, the latest activity on the account, the current balance, and any amounts that are past due.
Each account includes a code that explains whether the account is current, thirty days past due, sixty days past due, or ninety days past due, or if the account involves a repossession, charge off, turned over to a collection agency, or other collection activity. The report will also list under “inquiries” the names of creditors, employers, or insurers who have requested a copy of your credit report during the past year or two. It also includes creditors who have looked at your account to decide whether to send you an offer of new credit, but other creditors do not see this last item.
Many creditors will not even review all of this individual information in your account, but will only look at your credit score, which is a number that summarizes all the individual items in your credit report. There is no one scoring system that all credit bureaus and creditors use, but about 90% of the credit scores used by creditors are issued by FICO. A FICO credit score ranges from 350 to 900. FICO considers the following as detracting from your credit score:
History of missed payments (about 35% of the score).
High debt in comparison to your credit limits (about 30% of the score).
Small number of years of credit history (about 15% of the score).
Opening too many new accounts (about 10% of the score).
All credit of the same type (about 10% of the score).
How Does Continued Non-Payment Affect Your Credit Score?
Consumers are rightfully concerned about their credit score, but you should not respond to debt collector pressures by paying overdue low priority debts ahead of high priority ones just because of these concerns. An overdue bill may damage your credit score but very often the damage has already happened by the time a debt collector is threatening you.
For credit card debt and other debt payable on a monthly basis, the creditor will report the status of the debt to credit bureaus every month. The biggest impact on your credit score will be when the debt is reported as 30 or 60 days overdue. Once that happens, your score will not take that much more of a hit if you are 90, 120, or 150 days overdue.
When your account is referred to a collection agency, and the collection agency reports the debt to a credit bureau, your credit score will take another big hit. Continued non-payment after that will not change your score nearly as much. By the time you are being contacted by a debt collector, it is too late to do much about your credit score—rushing to pay the debt won’t really help your score.
As a result, worry about your credit score should not be a reason to pay a late bill. Responding to the collector’s pressure may not help your credit score, but it will put at risk payments on higher priority debts, whose non-payment will have far more serious consequences. Also, if you pay off a debt that was already reported by a collector, the collection item will show in your report as “paid,” but your credit report will still show that the debt was in collection. If you want that information removed, you must get the collector’s written agreement to delete it and not all collectors will agree to do so.
Typically, hospitals, doctors, and other medical providers will not report your debt to a credit reporting agency. It is only if and when a medical debt is turned over to a collection agency that many—but not all—collection agencies will report the overdue debt to a credit bureau. In addition, the three major credit bureaus have agreed not to include any report on medical debt if that debt has been outstanding for less than six months. Reporting of a medical debt over six months will hurt your credit score. But after that first report, continued non-payment to the collection agency will not affect your score much.
Most utilities will not report your delinquencies to a credit bureau until they say the bill is uncollectible. Until then there may be no adverse impact on your credit score to be late in paying gas, electric, landline telephone, or water bills.
Landlords are unlikely to report overdue rent to a credit bureau, but particularly larger landlords are likely to report problems with tenants to special tenant screening companies that landlords use to evaluate applicants. Thus your rent payments are less likely to affect your credit score than your ability to find another apartment.
In a significant development, the Big Three credit bureaus are not reporting the vast majority of public records, such as collection lawsuits, court judgments against you, and tax liens. Of course, the creditor or collector seeking payment may already have reported the overdue debt to the credit bureau, even if a public record about that debt (e.g., judgment or lien) is not reported by the credit bureau.
Most negative information stays on your credit report for seven years, and then the credit bureau must remove it from your report. Bankruptcies stay on your report for ten years from the date of filing.
Who Sees Your Credit Report and Who Does Not
While your credit report will affect you in a surprising number of situations, it will not affect many other aspects of your life. You can expect that your report will be viewed by the following:
Creditors when you apply for credit. A low score can mean you will be denied credit or pay a higher interest rate.
Employers in most states to evaluate you for hiring, promotions, and other employment purposes. This is somewhat limited in a number of states and cities, such as California, Colorado, Connecticut, the District of Columbia, Hawaii, Illinois, Maryland, Nevada, New York City, Oregon, Vermont, and Washington.
Government agencies trying to collect child support and when considering your eligibility for public assistance.
Insurance companies using special credit scores for homeowners and auto insurance.
Landlords when deciding whether to rent an apartment to you.
Utilities are more commonly reviewing your credit score to determine whether to charge you a security deposit—not as to whether to provide you service.
Your credit report should not be a problem in the following situations:
Your application for federal student loans and grants. Except for parents, graduate students, and professional school students applying for PLUS loans or anyone applying for a private student loan.
Your credit report will not damage your friends or relations, and need not even affect your spouse. For example, a creditor is not allowed to look at your credit record if your spouse, child, or parent applies for credit and they are not relying on your income or assets.
Your reputation in the community. No one can obtain your credit record for curiosity, gossip, or to determine your reputation. Your credit record is just between you and creditors—your neighbors and friends should never see it.
Divorce, child custody, immigration, and other legal proceedings. Your credit report shouldn’t be used in proceedings such as applications for citizenship or to register to vote.
How to Review Your Credit Report
The first step in learning about your credit report is to order copies from the three major credit bureaus and read these reports carefully. Because there can be differences between the three major national credit bureaus, you should order your report from all three. You are entitled to one free copy of your report every year from each of the three major bureaus, but you must order from the centralized request service, and not from the individual credit bureaus:
Go to www.annualcreditreport.com and click on “request your report through the mail,” print out and complete the Annual Credit Report Request Form and mail it to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281; or
Order online at www.annualcreditreport.com.
The ordering process may be more difficult online because you will be asked security questions based on information in your report, which some people find hard to answer.
For your free report from each credit bureau, you can order all three at the same time, or stagger the three throughout the year. You need to provide your name, address, Social Security number, and date of birth. If you have moved in the last two years, you may have to provide your previous address.
The credit bureaus are also required to give you an additional free copy of your report if:
You have been denied credit within the past sixty days;
You are unemployed and will be applying for a job within the next sixty days;
You are receiving public assistance;
You have reason to believe that the file at the credit bureau contains inaccurate information due to fraud; or
You have requested a fraud alert.
For free reports based on these reasons, contact the credit bureau directly: Equifax at 800-685-1111, www.equifax.com; Experian at 888-397-3742, www.experian.com; Trans Union at 888-916-8800, www.transunion.com.
You can also purchase a credit report. Federal law limits this to $12 per report, and in some states the maximum is even less. Colorado, Georgia, Maryland, Massachusetts, New Jersey, and Vermont resident can get an additional free report.
Getting Your Credit Score. Your free credit report will not come with your credit score. You have to specifically request your score, you may need to pay for it, and it may not even be based on the same scoring system as the score that your creditors use. But if a creditor rejects you or charges you a higher price for credit based on a credit score, it must give you a copy of that score and related information. Mortgage lenders are also required to give you information about your credit score for free. When you get your score, you will be sent the top four factors that most affect the score.
Beware Credit Monitoring and Other Subscription Products. Avoid monthly or annual subscription packages sold by the credit bureaus for credit monitoring or identity theft protection. They provide limited value, are not as effective as security freezes at preventing identity theft, and are expensive and over-priced. You can sometimes find credit monitoring and other services available for free. Sometimes expensive subscription plans are advertised as being initially free, so be careful what you sign up for!
Coping with a Bad Credit Report
Avoid Credit Repair Agencies, also called credit services, credit clinics, or similar names. Signing up with these agencies is almost always a really bad choice. They charge a hefty fee and usually cannot deliver what they promise. You generally can do a better job cleaning up your credit record at no cost, these agencies may even make matters worse for you or cause you legal problems.
Correct Errors in Your Report. When you have unpaid bills damaging your credit score, the last thing you want is inaccurate information in your credit file making matters worse. It is amazingly common to find incorrect information in your credit file, and you can take steps to correct this information.
After reviewing the report you received from each of the three major credit bureaus, send a written dispute to each credit bureau that has reported incorrect information. The credit bureau by law must investigate the entry and correct the mistakes. You can also dispute the error with the creditor that supplied the incorrect information to the credit bureau, but you should always make sure you dispute it also with the credit bureau in order to preserve your legal rights. Even if the credit bureau told you they are making the correction, after a period of time obtain another credit report to see if the correction was actually made or whether it has popped up again. Also send the first bureau’s statement of correction to the other two bureaus to ensure it is corrected there too.
You can also send a statement to the credit bureau explaining damaging items. Credit bureaus are required to accept these statements if they relate to why information in the report is inaccurate. They cannot charge to include this statement in your report.
Clean Up Your File with the Help of the Creditor. If the creditor insists information is accurate, the credit bureau is unlikely to change it in its files despite your written dispute. To prevail, you will have to convince the creditor supplying the information. Give the creditor whatever proof you have.
If your debt is in fact delinquent, you can try to improve your credit report by entering into an agreement with the creditor to pay all or some of the debt, up front or in installments. But you should get the creditor’s written agreement to inform the credit bureau to delete any reference to the debt ever being delinquent—otherwise the fact that you were previously delinquent will stay on your report. Another option is for the creditor to agree not to affirm the debt after you dispute it with the credit bureau. The bureau must remove the information if the creditor who supplied it does not affirm it is correct.
Prevent Identity Theft. Just as you do not want inaccurate information on your report, you do not want negative information caused by an identity thief using your Social Security number and credit history to open new credit, cell phone, or other accounts, and then default on those accounts. Below are listed three ways to protect your credit report from identity theft.
The first way is to place a “security freeze” on your credit history, that prevents your credit history from being shared with potential creditors. If your credit files are frozen, a thief will probably not be able to get credit in your name. A new federal law makes security freezes free of charge. If you need to apply for credit, you can ask that the freeze be temporarily lifted.
A second way is to place a fraud alert on your credit report. A fraud alert is a statement added to your report asking creditors to check with you before issuing credit. It requires creditors to take steps to verify the applicant’s identity. This is a less effective than a security freeze in preventing identity theft.
When a credit bureau receives your fraud alert request, it notifies the other major credit bureaus to also initiate a fraud alert. An initial fraud alert lasts one year. An extended alert lasts seven years and requires you to provide additional information, including an identity theft report from an appropriate law enforcement agency.
A third approach is to place a credit “lock” on your report. A credit “lock” is a product that prevents creditors from accessing your credit report, similar to a security freeze. However, it is a voluntary product not governed by federal or state law, so you have fewer legal rights if something goes wrong with the lock.
Shop Around for the Best Credit Offer. Predatory lenders look for consumers with blemished credit records to take unfair advantage with extraordinarily bad credit terms. Do not fall victim, but shop around. You will be surprised at how much better terms you may find even with your blemished credit record. The same credit score may be treated very differently by different creditors.
Don’t be afraid to shop for the best credit because you are worried that too many inquiries will lower your credit score. For some types of credit, such as mortgages or car loans, the credit scoring systems count multiple inquiries during a certain time period, such as 14 or 30 days, as only one inquiry because the system assumes you are shopping around. Even when a credit scoring system counts a large number of inquiries against you, it will have only a small impact on your score. Getting affordable credit and paying it off each month will outweigh any harm caused by too many inquiries.
Explain the Reason for a Low Credit Score. When applying for a credit card for example, you will not have an opportunity to explain why your credit score is not representative of your creditworthiness. But other situations will allow you to do so, for example when applying for employment, for rental housing, for insurance, or for a mortgage. For example, you can explain that loss of a job due to an illness caused an old default, but you are healthy now and re-employed. Some businesses will listen to your explanations while others will not. Keep trying until you find someone who will accept your explanation.
Rely on Someone Else’s Credit Score. If a husband and wife are seeking credit, and only one spouse has a bad credit record, you can apply in the name of the other spouse, relying exclusively on that spouse’s income and assets. Then the creditor is not allowed to look at the other spouse’s bad credit record. Another option is to apply for credit with a co-signer with a better credit score, but remember that the co-signer will be liable on the debt if you do not pay.
Rebuilding Your Credit
Do Not Rush Into New Credit Just to Build Your Credit Score. It is tempting to rebuild credit by getting new credit and making timely payments. You should not start trying to get new credit during times of financial difficulty simply to improve your credit report. This is likely to take your attention away from paying high-priority debts first. Definitely do not obtain credit from a creditor advertising “easy credit” or “no credit history required.” Many of these offers are rip-offs from lenders preying on consumers who fear that they cannot get traditional forms of credit. One of the most important steps you can take to cope with a bad credit history is to avoid getting deeper in debt during the bad times.
Stabilize Your Situation. In the long run, the most important thing for you to do to reestablish a good credit rating is stabilize your employment, income, and debts. This will prevent new delinquencies from being reported. While your past delinquencies can stay on your record as long as seven years, creditors are likely to ignore older debt problems if your situation becomes stable and if you start paying your present obligations.
Once you get back on track, each year your older debt problems will have less of an impact on your ability to obtain credit. Seven years will come around sooner than you might think, and then there will be no record of those past problems at all. If your financial problems are behind you, your credit record problems will not go away immediately. Be patient. Your credit profile will improve over time.
Establish New Credit Accounts (with Caution). You can improve your credit by getting new credit and paying it back on time. But be careful. Avoid causing yourself more problems by getting unaffordable high-rate credit. One way to avoid this trap is to wait until you are offered a credit card with reasonable terms. You may get credit card offers even though you have a negative credit history, but these offers may be for expensive subprime cards that offer little credit and charge high fees.
Another approach is to get a secured credit card, offered by some banks and other creditors. These cards require that you keep a cash balance with the card issuer and draw down on this amount. You need to be very careful in selecting a secured card because some offers are bad deals.
Finally, if you decide to get new credit, be sure that the creditor you use actually reports account information to a credit bureau. If not, your hard work to pay back the credit will not be reflected in your report.