How to read and understand your
told you to get a copy of your credit report as part of the pre-qualifying process
for a mortgage. The purpose, he said, was to see how your credit looked and
to clear up any errors that might be in the report.
But now that you've got
it, there are an awful lot of numbers, abbreviations and terms you've never
seen before. Trade lines, charge-offs, account review inquiries -- how do you
read this thing?
First off, there are three major credit-reporting agencies
in the United States: Experian, TransUnion and Equifax.
Order a copy of your credit report and review it for any
errors. Costs vary from state to state, but in most states, it costs $9 to get
your report. TransUnion,
Equifax and Experian all allow you to review your report online.
Plus thanks to a new
federal law you'll now be entitled to one free credit report from each
of these credit reporting agencies per year. Consumers in western states became
eligible to request their free annual credit report Dec. 1, but if you live
on the East coast you'll have to wait until Sept. 1, 2005. To find out when
you become eligible to receive a free credit report, check out Bankrate's map.
The reports will not automatically be sent out. Each consumer
must request their reports one of these three ways. Go to www.annualcreditreport.com,
which is the only authorized source for consumers to access their annual credit
report online for free. Or, call 877-322-8228. Lastly, you may complete the
form on the back of the Annual
Credit Report Request brochure, and mail it to: Annual Credit Report Request
Service, P.O. Box 105281, Atlanta, GA, 30348-5281. One more caveat: you'll
be able to order all three credit reports at one time, or at different times
throughout the year. It's your choice. But, be sure to order from the centralized
agency. If you go directly to the credit reporting agencies, you will be charged
unless you fit another criteria for a free report.
The new ruling doesn't replace the other ways to receive a free credit report.
You're still entitled to a free credit report if: you've been denied a loan,
insurance or job based on your credit report; you're applying for unemployment
or receive public assistance; and you currently reside in a state that already
offers an annual free credit report from each credit reporting agency (Colorado,
Maine, Massachusetts, Maryland, New Jersey and Vermont. Georgia residents are
entitled to two free annual credit reports from each credit reporting agency.)
"Looking at one is a useless endeavor; you need to look at
all three," says Howard Dvorkin, president of Consolidated Credit Counseling
Services in Fort Lauderdale, Fla. "People tend to pull one and think everything
is the same on all of them. That's not normally the case."
The reports will have different
information because it's a voluntary system, and creditors subscribe to whichever
agency they want -- if any at all.
Maxine Sweet, vice president
of consumer education at Experian, stresses the importance of ordering the report
directly from the credit bureau instead of asking a buddy who works at a bank
to pull one for you. Those are written for people who work in the credit industry.
The one you get from the credit bureau is designed for consumers.
"The information is
the same, but it's much more consumer friendly," she says.
Well, not quite
the same. The report sent to a lender will list the credit bureau member numbers
of your creditors and it won't have the complete list of every company that's
pulled your credit information for promotional purposes, like pre-approved credit
"If you compared the
two reports side by side, the consumer one will have a couple more pages of
information," says John Ulzheimer, client support specialist for credit
bureau products at Fair, Isaac and Co. Fair, Isaac is the creator of the FICO
score, the widely used credit scoring model that is used to determine a person's
Anatomy of a credit report
A credit report is basically divided into four sections: identifying information,
credit history, public records, and inquiries.
is just that -- information to identify you. Look at it closely to make sure
it's accurate. It's not unusual, Sweet says, for there to be two or three spellings
of your name or more than one Social Security number. That's usually because
someone reported the information that way. The variations will stay on your
credit report; "If it's reported wrong, we leave it because it might mess
up the link. Don't be concerned about variations."
Other information might
include your current and previous addresses, your date of birth, telephone numbers,
driver's license numbers, your employer and your spouse's name.
The next section is your
credit history. Sometimes, the individual accounts are called trade lines.
Each account will
include the name of the creditor and the account number, which may be scrambled
for security purposes. You may have more than one account from a creditor. Many
creditors have more than one kind of account, or if you move, they transfer
your account to a new location and assign a new number. The entry will also
- When you opened the account;
- The kind of credit (installment,
such as a mortgage or car loan, or revolving, such as a department store credit
- Whether the account is
in your name alone or with another person;
- Total amount of the loan,
high credit limit or highest balance on the card;
- How much you still owe;
- Fixed monthly payments
or minimum monthly amount;
- Status of the account
(open, inactive, closed, paid, etc.);
- How well you've paid
On Experian's report, your
payment history is written in plain English -- never pays late, typically pays
30 days late, etc. Other comments might include internal collection and charged
off or default.
"Charged off means
the creditor has given up, thrown in the towel," Ulzheimer says. "He's
made efforts to collect and written it off."
Other reports use payment
codes ranging from 1 to 9; an R1 or I1 on a report is an indication of a good
payment history on a revolving or installment account.
Better off blank
The next section is the part you want to be absolutely blank. The public records
section "is never a good story," Sweet says. "If you have a public
record on there, you've had a problem."
It doesn't list arrests
and criminal activities; just financial-related data, such as bankruptcies,
judgments and tax liens. Those are the monsters that will trash your credit
faster than anything else.
The final section is the
inquiries. That's a list of everyone who asked to see your credit report.
"Any time anyone gets
into the report, it'll post an inquiry," Ulzheimer says. "If you call
the credit bureau and ask for a copy, it will be on there. It's a very detailed
entry record. It's great for the consumer."
Inquiries are divided into
two sections. "Hard" inquiries are ones you initiate by filling out
a credit application or taking your child to the orthodontist. "Soft"
inquiries are from companies that want to send out promotional information to
a pre-qualified group or current creditors who are monitoring your account.
You may have heard that
a large number of inquiries can have a negative impact on your credit score,
but you're probably OK.
"The vast majority
of inquiries are ignored by the FICO scoring models," Ulzheimer says. "They're
not the steak in the steak dinner."
For instance, the model
has a buffer period that ignores inquiries within 30 days of getting a mortgage
or a car loan. It also counts two or more "hard" inquiries in the
same 14-day period as just one inquiry.
"You could have 30
in two weeks and it only counts as one," Ulzheimer says.
If you find a mistake on
your credit report -- an account that isn't yours or a disputed amount -- you'll
need to fill out the form that comes with the report, or follow the instructions
on the explanatory sheet.
The process takes time because
the creditors have 30 days to respond to a charge of a discrepancy. As long
as a charge is in dispute, that dispute will show up on your report. Long-time
lenders say it's common for reports to have errors. Some estimate that as many
as 80 percent of all credit reports have some kind of misinformation.
-- Updated: Jan. 14, 2005