What is a credit score and how is it determined? Let's start from the beginning. There are three credit repositories that track and report all credit related information: Equifax, Trans Union and Experian. Creditors report credit related information to credit bureaus. Credit bureaus then pass the information on to the credit repositories that document and transfer the information to your credit report. Within these reports is a history of all of your creditors, your payment history, current and past addresses, current and past employment and any public information like judgments, tax liens, etc. The credit repositories then apply a proprietary formula that generates a credit score, which they provide in the form of a credit report to both creditors and individuals. Creditors will use the credit report to determine whether or not to lend you money and at what interest rate.
Credit Report Inaccuracies
There have been several surveys conducted over the years in an effort to quantify the number of errors contained in credit reports, with findings ranging from 5% to 80%. Congress conducted an investigation concerning the accuracy of the information provided by the three credit repositories. The report to congress concluded that as much as 80% of the information provided by the repositories is incomplete, inaccurate, misleading, obsolete and/or erroneous. What does this mean to you? It means that when you go in to get that new car loan, you are being evaluated based on a credit report that could be as much as 80% inaccurate. Remember, your credit report will determine whether or not a creditor will lend you money and, more importantly, at what interest rate.
Consumer Rights
Federal law requires that your credit report be accurate, complete and verifiable. If you find that the information on your credit report is not exact and precise, then you have the right to challenge the report and ultimately remove the inaccurate items. Time is also important. Most negative information, by law, will remain on your credit report for seven years. Bankruptcies can remain on a credit report for ten years and federal tax liens for up to 15 years. Old or expired information can also be challenged and removed.
After removing all inaccurate information, the most effective way to improve your score is by paying down your revolving consumer debt. In fact, owing the same amount of money but having fewer open accounts may actually lower your credit score. In addition, the Federal Trades commission has established hundreds of laws and rulings geared to help protect consumers. Become familiar with your credit report and check it often. We recommended that you check your credit report from at least one credit repository every six months. Also, become familiar with the tools that are available to help build credit, establish new credit and remove inaccurate, negative information from your credit report.
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