In January, the Consumer Financial Protection Bureau (CFPB) fined two of the three major credit-reporting bureaus $23 million for taking advantage of consumers. Offenses ranged from giving one credit score to consumers and another, different, score to lenders and businesses to misleading customers into believing that they could access their credit report for free. It’s certainly worrisome considering these companies have a monopoly on producing our credit reports. Also, a credit report is central to the American way of life — the score derived from the report dictates everything from the apartments we can rent to the loans we’re granted.
I’m here to break down what’s actually in your credit report, how that’s different from your credit score, and how your score is actually calculated.
What does your credit report contain?
Your credit report contains five groups of information:
1. Identifying information: Your name, social security number and current and previous addresses are examples of identifying information.
2. Credit accounts: Any current or previous credit accounts (i.e. a mortgage, credit card, student loans, etc.), the account balances and your payment history are included here.
3. Collection Items: This section of the report lists any unpaid debt that’s gone into collection. Generally, you have 30 days before the collections agency reports this debt to the credit bureau, and puts the information on your credit report.
4. Public Records: This includes anything such as a bankruptcy, liens, foreclosures and civil suits. Usually, after 7 years, negative credit information including late payments and bankruptcies are removed from your credit score.
5. Credit inquiries: This section includes a list of everyone who has accessed your credit score in the past 2 years. Both hard and soft inquiries go on your credit report. A hard inquiry is when you formally apply for credit and lenders look at your credit report as a data point to decide if they will lend you credit. These inquiries can change your credit score. A soft inquiry is a review of your credit report by credit monitoring services or personal finance apps (like Cinch, for one). These inquiries have no affect on your credit score.
Your credit report will never contain your specific purchases, arrest records or medical records. If you have overdue child support, this information may be included on your credit report if it was provided by a state or local child support agency, or if the information was verified by a government agency.
The Fair Credit Report Act (FCRA) mandates that credit reporting companies provide you with a free copy of your credit report (not credit score) upon request once every 12 months. The Federal Trade Commission (FTC) provides more information on how you can request your report.
What does this have to do with my credit score?
A credit score and credit report are two different things, despite people using the terms interchangeably. A credit score is derived from your credit report. Thankfully, for the consumer, individual credit scores are regulated. This means there’s some transparency into how your credit score is calculated. In most cases it’s calculated by, FICO, an analytics company that is focused on credit rating services, and claims 90% of top lenders use the company’s services. This is how they calculate your credit score:
Payment history (35% of score): Making payments on time for any credit accounts you do have
Amount owed (30% of score): The amount you’ve borrowed compared to your credit limit
Length of credit history (15% of score): Generally, the older the length of your history, the better your score
Types of credit used (10% of score): Having a variety of credit types (i.e. mortgage, credit cards, and auto loans) can increase your score slightly
New credit (10% of score): Taking on new credit, but not adding too much too quickly
This data is then translated into a 3-digit credit score . The score consumers see range from 350 to 800. Higher scores usually make it easier to qualify for loans, and ensure you rope in lower interest rates. To take out a typical mortgage, you need a FICO score of 620. In order to qualify for the lowest interest rate, you’ll generally want a score of 760 or higher.
What else should I know about credit score?
You’ve probably heard a lot of hooplah and by extension a lot of myths on credit scores, but now that you’re equipped with the facts it’s time to ask the important question – what is the impact on you? Stay tuned for the next part in this series to learn more.