DebtFreeGuru.com's - Tip of the Week - Monday, July 12, 2004
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How
to Read Your Credit Report
Charge-offs,
inquiries, R1s -- what's it all mean? Here's how to understand this
increasingly crucial document.
By
Pat Curry, Bankrate.com (As seen on MSN.Com)
The lender
told you to get a copy of your credit report as part of the prequalifying
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
Order a copy
of your credit report and review it for any errors.
"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 card offers.
"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 credit risk.
Anatomy
of a credit report
A credit
report is basically divided into four sections: identifying information,
credit history, public records and inquiries.
Identifying
information 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 include:
-
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 card)
-
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 the account
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.
DebtFreeGuru.com - Tip of the Week - Monday, July 12, 2004
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