Checking your credit report

Whether you are applying for credit or a loan, knowing what your credit report says about you help will determine not just whether you get it—but how much you will pay for it. Your FICO score is your credit score. It is named after Fair Isaac Corporation, which creates proprietary credit scoring models.

While it is fairly simple to get your FICO score or credit report, it is, perhaps, unfairly important. Half of those who applied for their credit reports found mistakes on them according to the National Credit Reporting Association. The Federal Trade Commission says it receives more complaints about credit reporting than about any other issue.

The three credit reports that matter are Equifax (800) 685-1111, Experian (888) 397-3742, and TransUnion (800) 916-8800. You should not pay more than nine dollars for a single credit report, and depending on your location and your credit history, you may be able to get your credit reports for free. If you applied for a loan and were turned down, you are entitled to a free copy of your credit report, but you must request a copy by writing the correct credit bureau within 30 days of the rejection. With your request, you should include a copy of the declined loan application. You can also get a free report if you are unemployed, planning to apply for a job in the next 60 days, receiving public welfare assistance or believe that the credit file contains mistakes resulting from fraud. By September 1, 2005, everyone will be entitled to one free credit report each year.

Credit scores range from 300 to 850, with the vast majority of people falling into the 600 to 800 range. The higher your FICO score, the better. Borrowers applying for a mortgage with FICO scores above 680 are likely to get approved for a loan with only a cursory review. Those with scores between 620 and 680 undergo a more formal investigation, while a score below 620 means that if you do get a loan, you’ll probably pay through the teeth for it. These score breaks are not hard and fast, however; they are determined by each lender and can vary accordingly.

To confuse matters further, each of the three credit bureaus sells its own credit score to lenders, but the gold standard in the banking industry is the FICO score. Currently, the only place you can directly purchase all three of your FICO scores is myFICO.com. FICO scores from the individual credit bureaus are also available to consumers
from www.equifax.com, www.transunion.com, and www.experian.com.

Your FICO score is determined by five factors (each with different weights):

1. Your past payment history (35 percent). People who have paid on time in the past are a much safer bet for lenders than those who have missed some payments.
2. The way you have used credit and the amount of credit owed (30 percent). Someone who is maxed out or close to the limit on a credit card is considered riskier than a more conservative spender.
3. The length of time over which have you established credit (15 percent). People who have had credit for a long time are less risky to lenders.
4. The number of times you have asked for credit (10 percent). The fewer requests for credit cards or loans initiated over a short period, the better.
5. The types of credit you have established (10 percent). Someone with only a credit card is generally riskier than someone who has a combination of installment and revolving loans. (On installment loans, a person borrows money once and makes fixed payments until the balance is gone, while revolving borrowers make regular payments, each of which frees up more money to access.)

Knowing your credit score can help you improve your creditworthiness and negotiate for the best possible terms for very large transactions. This is why it’s critical to obtain your score three to six months
before applying for a mortgage or car loan.

Some of the things you can do to improve your credit score are:
• paying your bills on time.
• keeping your outstanding debt far below your credit limit.
• maintaining a long credit history.
• taking on new credit sparingly.

The Equal Credit Opportunity Act requires that if you are denied credit, the creditor must let you know the specific reasons for the denial, such as “Your income is low” or “You haven’t been employed long enough.” You cannot be unreasonably denied credit for not meeting “our minimum standards” or “not receiving enough points on our
credit scoring system.” If you were rejected because you are too near the limits on your charge cards, you may want to reapply after paying down your balances.

If you have been denied credit. or failed to get the rate or terms you want, find out if a credit scoring system was used to determined your credit score and what characteristics or factors were used in that system. Be sure to review the specific reasons in the denial letter as to why you were declined.

If you have made mistakes in paying previous loans, bounced checks, made late payments, or had other credit problems, you may still be able to reduce the amount of damage to your credit score with explanations. Make sure the facts on a credit report are correct.