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Overview
Credit plays a major role in your life. Understanding what it is
and how it works can be challenging. To learn the basics, begin
with two fundamentals: credit scores and credit reports.
Credit
Scores
Credit scoring is a statistically based tool used by professional
lenders to assess the likely future performance on a loan. Scores
will tell the lenders the likelihood of people repaying their loans
the way they might use their credit. Since scores cannot predict
with one hundred percent certainty, scores provide only a statistical
estimate of future performance.
Developing
Credit Scores
Credit scores are developed using several thousand consumer profiles.
A lender may choose to develop a custom scorecard using their criteria
as developmental data. In doing so, tens of thousands of pairs of
credit reports are obtained, one at each of two points in time.
The earlier report is used to generate the predictive information,
and the latter will determine the performance of the account in
two years since the observation of the predictive information. These
records are classified in two groups--those that have exhibited
good payment behavior in the two year period, and those that have
exhibited bad payment behavior the same period. The objective in
building the scorecards is to predict which of these two groups
a particular record is likely to be in the next two years.
Data
Included in Credit Scores
Your Payment History, or information on all open accounts such as
credit cards, retail accounts, mortgages, etc. will include any
presence of and adverse actions like bankruptcy, collection accounts,
etc. as well as the amounts past due and amounts paid as agreed.
- Amounts
Owed, including the number of accounts with balances, portion
of credit lines used and portion of installment loan amounts still
owed.
- Length
of Credit History including when the accounts were opened and
all activity since.
- Types
of Credit Used, including a number of various types of accounts
like credit cards, retail accounts, mortgages, etc.
- New
Credit, including the number of recently opened account and recent
credit inquiries.
Data
NOT Included in Credit Scores
- Race,
color, religion, national origin, sex and marital status.
- Age,
salary, occupation, title, employer, or employment history, where
you live, any interest being charged on a particular credit card
or other account, items reported as child or family support obligations
or rental agreements.
-
Consumer-initiated inquiries such as requests you have made in
order to check your credit report.
- Promotional
inquiries such as requests made by lenders in order to pre-approve
credit offers.
-
Administrative inquiries such as requests by lenders to review
your account with them.
- Requests
that are marked as coming from employers.
-
Participation in credit counseling.
Credit
Reports
Although each credit reporting agency may report information differently,
all credit reports contain your social security number, date of
birth and employment information. These items are used to identify
you and not used for scoring purposes.
Other
Information Contained in Credit Reports
- Credit
accounts. Your lenders report on each account you have with them.
They report the type of account, the date it was opened, the credit
limit or loan amount, the balance and your payment history.
-
Inquiries. When you apply for a loan, the lender requests a copy
of your credit report. The report lists both voluntary requests
(your own requests for credit) and involuntary requests (such
as lenders ordering your report to make you pre-approved offers).
- Public
record and collection items. Public record information includes
bankruptcies, foreclosures, suits, wage attachments, liens and
judgments.
Checking
Your Credit Report
Consumers can obtain a copy of their credit report for their records.
To get a free credit report, consumers can visit a website that
was created jointly by credit reporting companies at www.AnnualCreditReport.com.
You can also call 1-877-FTC-HELP. Consumers are allowed one free
report per year from each of the agencies. If you find an error,
the credit reporting agency must investigate and respond to you
within 30 days.
Rate
Shopping and Your Credit Report
When shopping for a loan, you may cause multiple lenders to request
your credit report even though you are only looking for one loan.
For your protection, credit scorers count multiple auto or mortgage
inquiries in any 14-day period as one inquiry. In addition, the
score ignores all mortgage and auto loan inquiries made in the 30
days prior to scoring. Therefore, if you find a loan within 30 days,
the inquiries won't affect your score while you are rate shopping.
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