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Understanding Credit Reports and Scores

Building a positive credit history (which is measured through credit reports and scores) can help you when getting a job or approval for housing or a loan.

The concept of “credit” can be complicated.

People sometimes confuse the words debt and credit because they both have to do with borrowing money.

A simplified way to tell them apart is to think of credit as the ability to borrow money and repay it later, while debt is the money that you have to repay whenyou’ve used credit.

You can have credit available to use without having debt. For example, you may have a credit card that is paid off—meaning you have credit available to use but don’t owe any debt.

When you take out a credit card or other loan, you create (or add to) your credit history.

Sometimes when people talk about their financial situation, they say they have “good credit” or “bad credit.”

This usually refers to their credit history. Credit reporting companies gather information from your credit history into a credit report.

A credit report may show some of your bill payment history, along with some public record information and a record of how often you have applied for credit.

A credit report may also show how much available credit you have, how much of your available credit you’re using, whether you have made your payments on time, and whether debt collectors have reported that they’re attempting to collect debt that you owe.

The information in your credit report is used to create credit scores.

Many lenders use credit scores to decide how much money they can lend you and how much interest to charge.

In general, the higher your credit score, the better the loan terms may be.

 

Why do credit reports and scores matter?

Some people say credit reports and scores don’t matter to them because they don’t plan to get a loan.

But the information in your credit reports is also used to make other kinds of decisions about you.

A poor credit history can make it difficult for you to:

• Get a job

• Get and keep a security clearance for a job, including a military position

• Get an apartment

• Get insurance coverage

• Pay lower deposits on utilities and get better terms on cell phone plans

• Get a credit card

• Improve your credit score (because the information used to calculate your scores comes from your credit history)

Having a poor credit history or low credit scores can create obstacles for you, such as costing you more money in terms of the price you will pay for loans, credit cards, and other services.

One reason it’s important to pay bills on time is to create a positive credit history and boost your credit scores.

You also need to pay attention to what’s in your credit reports.

Since credit scores are calculated based on the information in the reports, take the time at least once a year to make sure the information in your reports is accurate.

Credit reports

WHAT’S IN A CREDIT REPORT?

Credit reporting companies collect information about you from many sources, including “furnishers.”

Furnishers are people or companies that provide information about your credit, banking, payment history, and other behavior.

Each of the three nationwide credit reporting companies—Equifax, Experian, and TransUnion—collects information about you to make their own credit report.

So if you have credit, you will likely have more than one credit report.

It’s important to make sure that the information listed about you is accurate with all three companies.

Sometimes information about you isn’t reported to every credit reporting company, causing differences among your reports.

HOW IS MY CREDIT REPORT USED?

Lenders use credit reports to help them decide whether to loan you money and what interest rates they’ll offer you.

They also use your credit reports to determine whether you still meet the terms of an existing credit account.

Other businesses might use your credit reports to determine whether to offer you insurance; approve you to rent a house or apartment; or provide you with cable TV, Internet, utility service, or a cell phone plan.

If you agree to let an employer look at your credit report, it could also be used to make employment decisions about you.

Negative information on your credit report

Negative information, like a history of late payments or bankruptcy, can affect your ability to get credit and affect the terms of the loan offers you get.

Usually this kind of negative information can appear on your credit report only for a specified period of time—seven years for most items.

A bankruptcy can stay on your credit report for up to 10 years.

For civil suits and judgments, such as back child support payments, the information can appear on your credit report for seven years or until the statute of limitations has expired, whichever is longer.

Positive information, like a history of on-time payments, can stay on your credit report forever.

While there are usually time limits on how long negative information can appear on your credit report, most consumer reporting companies are allowed to keep negative information about you in their files forever.

They do this because there is no time limit on information (positive or negative) that a consumer reporting company may include in your credit report when you are applying for:

• Credit of $150,000 or more

• Life insurance with a face value of $150,000 or more

• A job with an annual salary of $75,000 or more

 

EXAMPLE CREDIT REPORT

Each of the three nationwide credit reporting companies presents information in a slightly different way. This is an example of a credit report that highlights the key sections you’ll find in all three companies’ credit reports.

It’s an example credit report and isn’t based on the format of any one specific credit reporting company.

Each company’s format varies in layout, look, and level of detail reported.

INCLUDES:

• Name

• Current address

• Social Security number

• Date and place of birth

• Employment history (this may not include all past jobs, but what’s listed should be accurate)

DOESN’T INCLUDE:

• Information such as race or ethnicity

INCLUDES:

• Financial public records such as consumer bankruptcies, judgments, state and federal tax liens

DOESN’T INCLUDE: • Records of arrests or convictions (specialty consumer reports, such as employment background screenings, often include arrests and convictions) • Marriage records or adoptions • Civil suits that haven’t resulted in judgments

NOTE The three nationwide credit reporting companies are required to ensure that new and existing public record information that they use comes from sources that include specific information about you. This includes your name, address, and either your Social Security number or date of birth.

This is to help keep the information accurate.

The credit reporting companies update this every 90 days.

INCLUDES:

• Any accounts with a collection agency

• The status of those accounts (both past and present)

TERMS IN THIS SECTION:

• Charge off

• Default • Delinquent

• Payment status

 

Account information

INCLUDES:

• Open accounts you currently have and closed accounts you had before

• Company name and account number • Date opened

• Last activity

• Type of account and status

• Whether you’re a co-signer, authorized user, or guarantor

• Date closed, if the account is no longer open • Credit limit

• The date information was reported to the credit reporting companies

 Account information

• Amount currently owed and, if you’re late with payments, the balance due (known as “items as of date”)

• Whether you owe a past due amount and the number of payments 30, 60, and 90 days late

• Whether the account was charged off or deemed so delinquent that the creditor thinks it’s unlikely they’ll be able to collect the debt

TERMS IN THIS SECTION:

• Charge off

• Default

• Delinquent

• Payment status

This example is fictional.

The credit card payment schedule is based on a credit card with a 22% percent APR.

In this example, the individual is paying down a balance of $4,252, paying the minimum payment each month calculated at the greater of $25 or the sum of 1% of the principal balance, finance charges, and fees.

He is not using the card to make additional purchases.

While credit card companies use a variety of methods to determine finance charges, a simple interest calculation was used for the purposes of this example.

Amounts were rounded to the nearest dollar.

Making the minimum payment, it will take the consumer 17 years and 9 months to pay off this credit card debt.

He will also pay $6,731 in interest assuming no late fees.

INCLUDES:

• Hard inquiries are made by lenders after you apply for credit.

These inquiries may affect your credit score.

This is because most credit scoring models look at how recently and frequently you apply for credit.

 Inquiries made to your account

• Soft inquiries are reviews of your credit file when you have not sought to establish a new credit account.

They include reviews of existing accounts by lenders, prescreening inquiries by prospective lenders, and your requests for your annual credit report.

These won’t affect your credit score.

DEFINITIONS OF TERMS CREDIT REPORTING COMPANIES USE

Authorized user

A person permitted to use a credit card account, but who is not responsible for making payment on the account.

The payment status of the account (positive or negative) can be shown on the credit report of both the authorized user and the account’s owner.

bankruptcy

A legal process in which the consumer’s assets are used to pay off creditors.

Any eligible debts not paid through the assets are discharged.

This will be in the public records section of the credit report.

bankruptcy

A legal process in which a consumer enters into a payment plan to pay off creditors using future income.

These are arranged by the courts.

Once the payment plan is complete, remaining eligible debts are discharged.

This will be in the public records section of the credit report.

Charge off

When a business decides an account is uncollectible.

However, the consumer is still responsible for the debt, and collections will likely continue on this debt.

A debt may be charged off after the lender has tried to collect it for some time.

This doesn’t mean that the debt itself is erased—the consumer still legally owes the debt, and it can be collected.

In many cases the right to collect the debt is taken over by a collection agency.

Closed date

The date an account is closed.

An account can be closed by the business or the consumer.

If there is still a balance when the account is closed, the consumer is still responsible for paying it.

Default

The consumer is not meeting the requirements agreed to when taking out the loan.

An account that has been delinquent (late) for several 30- day billing cycles is generally considered to be in default.

Delinquent

An account that hasn’t been paid on time and is late.

Generally delinquencies are expressed as being 30, 60, 90, or 120 days or more delinquent.

Discharge

When the court releases a consumer of responsibility for a debt as part of the bankruptcy process.

Dispute

Consumers have a right to challenge and require investigation of information they believe is incorrect on their credit reports.

Consumers must start the dispute process.

End user

The business or individual that receives a credit report.

Information provider or furnisher

A business or individual that reports information to a credit reporting company.

Payment status

The history of the account including on-time payments as well as delinquencies and other negative items

You can get a free credit report from each of the three nationwide credit reporting companies once every 12 months. Order your free credit reports at annualcreditreport.com. 

Some websites that offer free credit reports may be trying to sell you something. Some companies offer free credit reports, but you may have to buy another product or service to get them. Go to annualcreditreport.com to get your free annual credit report.

You can get additional free credit reports during a year if:

• You’re unemployed and plan to look for a job in the next 60 days

• You receive public assistance

• You believe that your credit file is inaccurate due to fraud

• Your report has recently been changed due to a disputed error

• You had a consumer reporting company place an initial fraud alert on your credit file

• You had a consumer reporting company place an extended fraud alert on your credit file

• You’ve been denied things like credit, employment, or insurance because of information in your credit report—in this case, you have 60 days to request your report from when you get the notice In a few states, state law also gives you a second free annual report.

By law, a credit reporting company can’t charge more than $12 for an additional credit report (as of 2018).

CREDIT REPORTS FOR MINORS

If you’re under 18, you won’t have a credit report unless you:

• Are an authorized user or joint owner on an account

• Are an emancipated minor • Live in a state that allows you to enter contracts below the age of 18 and you’ve done so

• Have student loans If none of these apply to you and you have a credit report earlier than age 18, you may have been the victim of identity theft or credit or financial fraud.

Equifax allows the parent or legal guardian to order a minor’s credit report by calling (877) 784-2528. Experian allows minors age 14 and older (or their guardians) to obtain their own credit report by mail or by calling (800) 311-4769.

Parents or guardians of minors 13 years or under may request a minor’s credit report by mailing or electronically uploading a request form and supporting documents to Experian.

Forms and instructions are available at experian.com.

TransUnion allows a parent or legal guardian to order a minor’s credit report.

A report is only available if the minor has a legitimate credit history (they are the joint owner or an authorized user on an account).

You can send an email to childidtheft@transunion.com to see if a credit file exists.

Or you can go to transunion.com and complete the Child Identity Theft Inquiry Form.

Read more about credit reports for minors at consumerfinance.gov/askcfpb/1271.

If you work with youth in foster care, there are special rules set up for how to get their credit reports.

Learn more at consumerfinance.gov/ask-cfpb/search-by-tag/ foster_youth.

WHAT TO DO ABOUT ERRORS ON YOUR CREDIT REPORTS

If you find something wrong on your credit report, you should dispute it.

You can contact either the credit reporting company (most often Equifax, Experian, or TransUnion) directly or the company that provided the incorrect information (the information furnisher or creditor).

It can be a good idea to contact both.

Here’s how it works:

• File your dispute with the information furnisher or the credit reporting company.

• They generally have 30 days to investigate your dispute.

• If you submit additional information after filing your original dispute, they get another 15 days to investigate.

• They must send you written notice of the result within five business days of completing the investigation.

• If the dispute results in a business changing the information it furnished or reported to a credit reporting company about you, they must notify the credit reporting companies of the change.

• If you filed your dispute with a credit reporting company and they find information to be inaccurate or incomplete, or that it can’t be verified, the credit reporting company must delete the item or correct the information in your file and notify the furnisher of the error.

You also have a right to an additional free annual credit report to ensure the errors have been fixed.

If the dispute isn’t handled or an error isn’t fixed in a timely manner, you can also submit a complaint to the Bureau at consumerfinance.gov/complaint or by calling (855) 411-2372

Use the “Disputing errors on your credit reports” tool to help you get started with the dispute process.

 

 

Credit scores

WHAT ARE CREDIT SCORES?

Credit scores are calculated using the information in credit reports.

A higher score makes it easier to qualify for a loan or lower interest rates.

Credit scores vary because different companies may look at different information about you and use different formulas for calculating your scores.

Scoring companies may also create different credit scores that are used when you apply for different types of credit.

As a result, you have more than one credit score.

Banks, credit card companies, and lenders may use different credit scores to make decisions about offering you credit.

HOW ARE CREDIT SCORES CALCULATED?

Scoring companies have different mathematical formulas to calculate credit scores, all typically starting with the information from your credit report.

Two of the most commonly used credit scores are FICO (calculated using formulas from Fair Isaac Corporation) and VantageScore (calculated using formulas from VantageScore Solutions).

Each of these companies produces multiple versions of their scores for different purposes.

These scores usually range from 300 to 850.

A FICO score above 700 is considered good by most businesses, and scores of 750 and higher are considered the best.

FICO shares this information with the public about what goes into its scores:

 

Payment history tracks whether you’re paying your bills on time.

This is the biggest factor in your FICO scores.

Paying bills late, not paying bills at all, and having bills that go to collections will likely cause your scores to drop.

Paying your bills on time may help increase your scores.

Amounts owed tracks what you owe, including debts that you are paying down over time.

It also includes your credit utilization rate, which is how much of your available credit you’re using.

When the credit that’s available to you decreases because you’ve used a portion of it and now owe money, your scores may drop.

Length of credit history tracks how long you’ve had credit accounts—the longer the history, the more positive affect on your scores.

A long credit history provides strong evidence of how you use credit and patterns of your payment behavior.

New credit is tracked by measuring credit inquiries about you made by creditors and others.

If there are too many inquiries, it may signal that you have a high demand for credit.

Because this may be an indicator of risk, your scores may drop.

Your scores are not affected at all when you check your credit reports yourself.

Types of credit used are also considered. For example, your FICO scores may increase if you have both revolving credit (such as credit cards) and other types of credit, such as a mortgage or an auto loan that you repay in installments, in good standing.

Generally, it’s considered a good thing to have a mix of credit, such as a mortgage, an auto loan, and not too many credit cards.

VantageScore shares this information with the public about how its scores are calculated.

GETTING YOUR CREDIT SCORES

Usually, you have to pay for a credit score.

Some lenders, such as credit card companies, may provide you a credit score for free on your account statement or when you log onto your account online or through a mobile app.

There are certain instances where you’re entitled to a free credit score. For example, if you’re denied a loan on the basis of your credit score, the lender must send you a notice telling you this and include your score.

Since there are many credit scores you can purchase in the marketplace, the one you purchase will most likely differ from the credit score used by a bank, lender, or other third party to assess your creditworthiness.

There’s no way to know how much these scores will vary so the scores you purchase can’t give you an exact guide for how creditors will view your credit quality.

Knowing what’s in your credit report and fixing errors is more important when building your credit than paying to find out a credit score.

A credit score may be a good initial indication of your credit standing, but it can’t tell you all you need to know before you apply for a loan.

Using credit

CREDIT UTILIZATION

The amount of credit you’re using compared to the limit on your credit accounts is your “credit utilization rate.”

Many experts advise keeping your use of credit to no more than 30 percent of your total credit limit on your revolving credit accounts (for example, the total limit on all your credit cards combined).

For example, if your total available credit is $10,000, you should have a balance of $3,000 or less.

Experts advise to keep a lower credit utilization rate because credit scoring formulas penalize you for using too much of the credit available to you. High usage may lower your credit score.

Here’s how you can figure out your credit utilization rate:

If you only have one credit card with a $5,000 credit limit, and you have charged $3,500 on this card, your credit utilization rate is $3,500 (amount charged to credit card) divided by $5,000 (credit limit) = 0.7 or 70 percent

If you set a goal of lowering your credit utilization rate to 25 percent or less, your credit card balance should be no more than $1,250, or $5,000 (the credit limit) multiplied by .25 (25 percent).

You don’t know when a credit card company will report your balance to credit reporting companies.

If at any time during the month your credit utilization rate is higher than the rate the scoring model thinks is appropriate, you run the risk of lowering your credit scores.

This means that the amount you have charged on a credit card can affect your credit scores even if you pay that amount down at the end of the month.

ARE YOU “CREDIT INVISIBLE”?

A limited credit history can create real barriers if you’re looking to access credit.

You might want credit to start a business or buy a house or car, or you might just want credit that comes with better terms, including a lower interest rate.

A limited credit history can make it very difficult for a lender to use a credit scoring model to calculate a score for you.

Some consumers are considered “unscorable” because they have a thin credit file (an insufficient credit history) or a stale credit file (no recent credit history).

Consumers without a credit history are “invisible” to the nationwide credit reporting companies because they have no records for them to create a credit report or credit scores.

If you don’t have a credit history and want to build one, use the “Getting and keeping a good credit history” tool to take your first steps.

You can learn more about people who are “credit invisible” at consumerfinance. gov/about-us/blog/who-are-credit-invisible.

 

Requesting your free credit reports

Make a plan for requesting your free credit reports once every 12 months.

Your credit report can be used for more than just a loan approval.

That’s why it’s important to look at your reports each year to make sure your information is correct.

You should request your credit report from all three nationwide credit reporting companies—Equifax, Experian, and TransUnion—since each report can have different information in it.

What to do Pick a method to order your credit reports.

You can get them online, by phone, or by mail.

If you get your reports online, be sure you’re accessing them from a safe and secure device and location.

Be very cautious doing this on public computers, since you’re accessing sensitive personal information and you want to keep it safe.

Be ready to answer some security questions if you request your report online or by phone.

You’ll be asked questions that are meant to be hard for anyone but you.

If you can’t answer, you’ll have to request the report by mail.

Questions might be:

How much is your monthly mortgage or car payment?

Which bank is your auto loan from?

Decide when you’ll order each report.

Consider getting a report from a different credit reporting company every four months, as a way to monitor your credit for free

Downloads

How do I dispute an error on my credit report?

To dispute an error on your credit report, contact both the credit reporting company and the company that provided the information.

Step 1: Dispute the information with the credit reporting company

If you identify an error on your credit report, you should start by disputing that information with the credit reporting company (Experian, Equifax, and/or Transunion). You should explain in writing what you think is wrong, why, and include copies of documents that support your dispute. You can also use our instructions  and template letter  as a guide.

If you mail a dispute, your dispute letter should include:

  • Contact information for you including complete name, address, and telephone number
  • Report confirmation number, if available
  • Clearly identify each mistake, such as an account number for any account you may be disputing
  • Explain why you are disputing the information
  • Request that the information be removed or corrected
  • Enclose a copy of the portion of your credit report that contains the disputed items and circle or highlight the disputed items. You should include copies (not originals) of documents that support your position.

You may choose to send your letter of dispute to credit reporting companies by certified mail and ask for a return receipt, so that you will have a record that your letter was received.

You can contact the nationwide credit reporting companies online, by mail, or by phone:

Equifax

Online: www.ai.equifax.com/CreditInvestigation 

By mail: Download the dispute form 
Mail the dispute form with your letter to:

Equifax Information Services LLC
P.O. Box 740256
Atlanta, GA 30348

By phone: Phone number provided on credit report or (866) 349-5191

Experian

Online: www.experian.com/disputes/main.html 

By mail: Use the address provided on your credit report or mail your letter to:

Experian
P.O. Box 4500
Allen, TX 75013

By phone: Phone number provided on credit report or (888) 397-3742

TransUnion

Online: https://dispute.transunion.com 

By mail: Download the dispute form 
Mail the dispute form with your letter to:

TransUnion LLC
Consumer Dispute Center
P.O. Box 2000
Chester, PA 19016

By phone: (800) 916-8800

Keep copies of your dispute letter and enclosures.

Step 2: Dispute the information with the company who provided the information (also known as the furnisher)

If you would like to submit a dispute regarding the information a company provided to the credit reporting company (called a furnisher), use our instructions , along with a template letter  as a guide. Examples of information furnishers are your bank, your apartment landlord, or your credit card company.

What happens after you dispute information on your credit report?

Credit reporting companies must investigate your dispute, forward all documents to the furnisher, and report the results back to you unless they determine your claim is frivolous. If the consumer reporting company or furnisher determines that your dispute is frivolous, it can choose not to investigate the dispute so long as it sends you a notice within five days saying that it has made such a determination.

If the furnisher corrects your information after your dispute, it must notify all of the credit reporting companies it sent the inaccurate information to, so they can update their reports with the correct information.

If the furnisher determines that the information is accurate and does not update or remove the information, you can request the credit reporting company to include a statement explaining the dispute in your credit file. This statement will be included in future reports and provided to whoever requests your credit report.