Introduction to Credit

You are most likely already familiar with the concept of "credit," the reputation for paying your bills on time that makes it possible for you to obtain money or goods with the understanding that you will pay for them later. In fact, you probably have already put your credit to work for you. You employed it when you obtained an auto or student loan, used your credit card to pay for a trip or new suit, or were chosen as the tenant for your rented apartment or house. A solid history of paying your bills may also have been just the objective character reference needed to help you land your job, too.

But even if you use your credit every day, you may have questions about the credit industry and how it affects you. In today's society, credit is much more complicated than keeping a tally at the local grocery. As a credit-active consumer, you need to know how credit decisions are made.

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What Factors Determine Your FICO® Score

When applying for credit, everyone wants to be thought of as a good credit risk. But what is a good risk? Most lenders use FICO® credit risk scores to obtain a fast, objective measure of your credit risk. By understanding the factors that can help or hurt your score, you'll have a better understanding of how lenders see you and how you can improve your credit standing.

The five factors that determine your FICO score are:

1. Payment History (approximately 35% of your score)
The factor that has the biggest impact on your score is whether you have paid past credit accounts on time. However, an overall good credit picture can outweigh a few late payments, and late payments will continue to have less impact over time.

2. Amounts Owed (approximately 30%)
Having credit accounts and owing money doesn't mean you are a high-risk borrower. But owing a lot of money on numerous accounts can suggest that you are overextended and more likely to make some payments late or not at all. Part of the science of scoring is determining how much debt is too much for a given credit profile.

3. Length of Credit History (approximately 15%)
In general, a longer credit history will increase your FICO score. Lenders want to see that you can responsibly manage your available credit over time. However, even people who have not been using credit very long may get high scores, depending on how the rest of their credit report looks.

4. New Credit (approximately 10%)
People today tend to have more credit and to shop for credit more frequently. But opening several credit accounts in a short period of time can represent greater risk-especially for people with short credit histories. Requests for new credit can also represent greater risk. However, FICO scores are able to distinguish between a search for many new credit accounts and rate shopping. FICO scores generally do not associate shopping for the best rate on a loan with higher risk.

5. Types of Credit in Use (approximately 10%)
Your FICO score will reflect your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. While a healthy mix will improve your score, it is not necessary to have one of each, and it is not a good idea to open credit accounts you don't intend to use. The credit mix usually won't be a key factor in determining your score-but it will be more important if your credit report doesn't have much other information on which to base a score.

Interpreting Your Score

When you or a lender receives your FICO score, up to four "score reasons" accompany the score. This helps to explain the top reasons why your score was not higher. These reasons are more useful than the score itself in helping you determine how you might improve your score over time, and whether your credit report might contain errors. However, if you already have a high score (for example, in the mid-700s or higher) some of the reasons may not be very helpful, as they may reference the factors that have the least impact on your score, such as: length of credit history, new credit and types of credit in use.

Here are the top 10 most frequently given score reasons. Note that the specific wording given by your lender may be different from the reasons shown in this list.

* Serious delinquency.
* Serious delinquency, and public record or collection filed.
* Derogatory public record or collection filed.
* Time since delinquency is too recent or unknown.
* Level of delinquency on accounts.
* Number of accounts with delinquency.
* Amount owed on accounts.
* Proportion of balances to credit limits on revolving accounts is too high.
* Length of time accounts have been established.
* Too many accounts with balances.

While there are no quick fixes for raising your score, by applying this information over time, you can improve your score and your financial outlook.

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What Is A Credit Bureau?
A credit bureau or credit reporting agency is in the business of gathering, maintaining, and selling information about consumers' credit histories. It collects information about consumers' payment habits from credit grantors like banks, savings and loans, credit unions, finance companies, and retailers. The credit bureau stores this information in a computer database and sells it to credit grantors in the form of credit reports. When you apply for a new credit card or loan, the credit grantor orders your credit report from at least one credit bureau and analyzes the information to decide whether to grant you credit. The credit bureau charges the credit grantor a fee for every credit report sold.

Although credit reporting agencies provide your credit report to lenders when you apply for credit, they do not make actual lending decisions. It is up to the lender to evaluate your credit report and any other factors they consider important and then decide whether or not to offer you credit.

The Three Consumer Credit Bureaus
There are three major credit bureaus that provide nationwide coverage of consumer credit information in the United States: Equifax, Experian, and Trans Union. Although many national lending institutions report consumer credit information to all three, smaller banks and other credit grantors may report to only one-or even none. That's why your credit report from one credit bureau is not necessarily exactly the same as your credit report from another.

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What Exactly Is A Credit Report?
A consumer credit report is a document that contains a factual record of an individual's credit payment history. Credit grantors are permitted by law to review your credit report to objectively determine whether to grant you credit. There are 190 million credit active people in the United States who have a charge account, car loan, student loan, or home mortgage. As those people pay their bills, most lenders report credit payment information to credit bureaus. So most of the information in your consumer credit report comes directly from the companies you do business with.

What Information Does A Credit Report Contain?
A consumer credit report contains four types of information: identifying information, credit information, public record information, and inquiries.
Identifying information includes:
* Your name.
* Your current and previous addresses.
* Your Social Security number.
* Your year of birth.
* Your current and previous employers.
* If you're married, your spouse's name.

Credit information includes credit accounts or loans you have with:
* Banks.
* Retailers.
* Credit card issuers.
* Other lenders.

Most information, whether positive or negative, remains on your credit report for 7 years from the date it is first reported, and then cycles off automatically. If there is inaccurate information in your credit report, you have the right to dispute it and have it removed.

Public record information includes any information that's contained in state and county court records, like:
* Bankruptcies.
* Tax liens.
* Monetary judgments.

Bankruptcies can remain on your credit report for up to 10 years. Other public record information can remain for up to 7 years.
Inquiries indicate to other credit grantors that you have applied for new credit that could result in additional debt. Potential lenders view multiple recent inquiries on your credit report as a sign that you are overextending yourself. Most inquiries stay on your credit report for up to two years.

(A credit risk score may also be included when your report is provided to a credit grantor, although it is not included on consumer review reports. The ways to calculate and use a credit score vary widely, so a score has little meaning outside of the context of a particular lender's unique guidelines for use. Therefore, it is not included on consumer review reports.)

What is a Credit Risk Score?
A credit risk score is an assessment of an individual's credit worthiness based on a statistical analysis of the information contained in his or her credit report. The most well known type of credit risk score is the Fair, Isaac or FICO score. Sophisticated mathematical processes calculate the summary by assigning numerical values to various pieces of information in the credit report. Credit bureaus provide risk scores to credit grantors who use them to objectively evaluate an applicant's credit-worthiness. The score itself is relative and will be viewed differently by creditors depending on numerous factors, including the creditor's risk level, marketing goals, and business practices. Your risk score will change over time as your credit history develops.

Does A Credit Report Contain Other, Unrelated Personal Information?
No. Your consumer credit report does not contain information about your race, religious preference, medical history, personal lifestyle, personal background, political preference or criminal record.

Who May Check My Credit Report?
Federal Law carefully regulates how credit reports can be used and by whom. Individuals have the right to obtain their own reports, and businesses must meet the following requirements before they can access credit information:
* A background Proof of a permissible purpose under federal law
* Check and on-site inspection of the business
* A current business license
* A signed contract requiring the business to use the data properly

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What Is A Mortgage Report?

A mortgage report is a special credit report that lenders use prior to deciding whether or not to give you a home loan. Each report is compiled from credit reports from two or three credit bureaus. The mortgage credit reporting company purchases credit reports from the credit bureaus, combines them, and manually verifies specific information such as employment, credit account balances and public record information.

An employment report is a modified credit report that helps potential and current employers make hiring and promoting decisions. The employment report contains much of the same information about your loans and credit cards that your credit report has listed. However, your marital status, year of birth, and account numbers are omitted from the employment report.

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