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Credit Education

Why is credit important?
What is a credit file?
What are credit reporting agencies?
What is credit scoring?
Why is credit scoring used?
How is a credit scoring model developed?
What can I do to improve my score?
How reliable is the credit scoring system?
What happens if you are denied credit or don't get the terms you want?
How long does information remain on a credit file?
What is an inquiry?
Sample Dispute Letters
Abbreviations used on a credit profile
Thinking of using a Credit Repair Agency? You may want to think again.
Credit Education Specialists
Credit tips for homeowners
Credit tips for college students
Credit tips for job applicants
The Fair Credit Reporting Act (FCRA)

Why is credit important?

Credit isn’t just for shopping – it can be essential to achieving many of the most important goals in your life. These include buying a home, paying for college, even looking for a new job. These days, your credit rating can affect almost everything you do. And if you have a good credit record, you have more opportunities to get the things you want, and to accomplish your goals. That’s why it is so important for you to establish, maintain and protect your credit record.

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What is a credit file?

Your credit file is a listing of your payment history on all your credit cards and loans, including your mortgage. It includes information about outstanding loans, debt repayment and credit limits. It may also include non-credit information, such as jobs you have held, public record information, your date of birth and your address. Lenders review your credit file when you apply to them for credit. They use the file's information in deciding whether or not to give you a loan. Credit files are maintained by private companies known as credit reporting agencies. The three largest national credit reporting agencies are Experian, Equifax and TransUnion. Credit reporting agencies collect information from creditors about the payments you make for auto loans, student loans, installment loans, mortgages, rent, insurance, credit cards, or other credit.

What are credit reporting agencies?

Credit reporting agencies are private companies that maintain credit files. In the United States there are three major national credit reporting agencies - Experian, Equifax and TransUnion. In addition to these three, there are many other smaller local reporting agencies. Many of the local reporting agencies are affiliated with, and report their information to, one of the three major national credit reporting agencies.

What is credit scoring?

Credit scoring is a system creditors use to help determine whether to give you credit. Information about you and your credit experiences, such as your bill-paying history, the number and type of accounts you have, late payments, collection actions, outstanding debt, and the age of your accounts, is collected from your credit file. Using a statistical program, creditors compare this information to the credit performance of consumers with similar profiles. A credit scoring system awards points for each factor that helps predict who is most likely to repay a debt. A total number of points -- a credit score -- helps predict how creditworthy you are, that is, how likely it is that you will repay a loan and make the payments when due. Because your credit file is an important part of many credit scoring systems, it is very important to make sure it's accurate before you submit a credit application.

There are many different scoring models. Many lenders devise their own scoring models using variables that are important to them, so the score that you get from one creditor probably won’t mean very much to another creditor.

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Why is credit scoring used?

Credit scoring is used to speed the application process and to automate the analysis of credit applications. Credit scoring is based on real data and statistics, so it usually is more reliable than subjective or judgmental methods. It treats all applicants objectively. Judgmental methods typically rely on criteria that are not systematically tested and can vary when applied by different individuals.

How is a credit scoring model developed?

To develop a model, a creditor or an organization skilled at mathematical modeling selects a random sample of customers or a sample of similar customers if their sample is not large enough, and analyzes it statistically to identify characteristics that relate to creditworthiness. Then, each of these factors is assigned a weight based on how strong a predictor it is of who would be a good credit risk. Each creditor may use its own credit scoring model, different scoring models for different types of credit, or a generic model developed by a credit scoring company.

Under the Equal Credit Opportunity Act, a credit scoring system may not use certain characteristics like—race, sex, marital status, national origin, or religion—as factors. However, creditors are allowed to use age in properly designed scoring systems. But any scoring system that includes age must give equal treatment to elderly applicants.

What can I do to improve my score?

Credit scoring models are complex and often vary among creditors and for different types of credit. If one factor changes, your score may change—but improvement generally depends on how that factor relates to other factors considered by the model. Only the creditor can explain what might improve your score under the particular model used to evaluate your credit application.

Nevertheless, scoring models generally evaluate the following types of information in your credit file:

Have you paid your bills on time? Payment history typically is a significant factor. It is likely that your score will be affected negatively if you have paid bills late, had an account referred to collections, or declared bankruptcy, if that history is reflected on your credit file.
What is your outstanding debt? Many scoring models evaluate the amount of debt you have compared to your credit limits. If the amount you owe is close to your credit limit it may have a negative effect on your score.
How long is your credit history? Generally, models consider the length of your credit track record. An insufficient credit history may have an effect on your score, but that can be offset by other factors, such as timely payments and low balances. Scoring models may be based on more than just information in your credit file. For example, the model may consider information from your credit application as well: your job or occupation, length of employment, or whether you own a home. To improve your credit score under most models, concentrate on paying your bills on time, paying down outstanding balances, and not taking on new debt. It's likely to take some time to improve your score significantly.
Have you applied for new credit recently? Many scoring models consider whether you have applied for credit recently by looking at "inquiries" on your credit file when you apply for credit. If you have applied for too many new accounts recently, that may negatively affect your score. However, not all inquiries are counted. Inquiries by creditors who are monitoring your account or looking at credit files to make "prescreened" credit offers are not counted.
How many and what types of credit accounts do you have? Although it is generally good to have established credit accounts, too many credit card accounts may have a negative effect on your score. In addition, many models consider the type of credit accounts you have. For example, under some scoring models, loans from finance companies may negatively affect your credit score.

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How reliable is the credit scoring system?

Credit scoring systems enable creditors to evaluate millions of applicants consistently and impartially on many different characteristics. But to be statistically valid, credit-scoring systems must be based on a big enough sample. Remember that these systems generally vary from creditor to creditor.

Although you may think such a system is arbitrary or impersonal, it can help make decisions faster, more accurately, and more impartially than individuals when it is properly designed. And many creditors design their systems so that in marginal cases, applicants whose scores are not high enough to pass easily or are low enough to fail absolutely are referred to a credit manager who decides whether the company or lender will extend credit. This may allow for discussion and negotiation between the credit manager and the consumer.

What happens if you are denied credit or don't get the terms you want?

If you are denied credit, the Equal Credit Opportunity Act requires that the creditor give you a notice that tells you the specific reasons your application was rejected or the fact that you have the right to learn the reasons if you ask within 60 days. Indefinite and vague reasons for denial are illegal, so ask the creditor to be specific. Acceptable reasons include: "Your income was low" or "You haven't been employed long enough." Unacceptable reasons include: "You didn't meet our minimum standards" or "You didn't receive enough points on our credit scoring system." If a creditor says you were denied credit because you are too near your credit limits on your charge cards or you have too many credit card accounts, you may want to reapply after paying down your balances or closing some accounts. Credit scoring systems consider updated information and change over time.

Sometimes you can be denied credit because of information from a credit file. If so, the Fair Credit Reporting Act requires the creditor to give you the name, address and phone number of the credit reporting agency that supplied the information. You should contact that agency to find out what your file said. This information is free if you request it within 60 days of being turned down for credit. The credit reporting agency can tell you what's in your file, but only the creditor can tell you why your application was denied. If you've been denied credit or didn't get the rate or credit terms you want, ask the creditor if a credit scoring system was used. If so, ask what characteristics or factors were used in that system, and the best ways to improve your application. If you get credit, ask the creditor whether you are getting the best rate and terms available and, if not, why. If you are not offered the best rate available because of inaccuracies in your credit file, be sure to dispute the inaccurate information in your credit file.

How long does information remain on a credit file?

Delinquent payments are listed on your credit file for seven years from the date of delinquency. Positive account information will remain on your credit file for at least 10 years. Collection items are listed on your credit file for seven years from the date the account was 180 days delinquent with the original creditor. Judgments are listed on your credit file for seven years. A tax lien is listed for seven years from the date paid. Most bankruptcies (Chapters 7, 11, and 12) are listed for 10 years. A Chapter 13 bankruptcy is listed for 7 years. Inquiries are listed on your credit file for up to two years.

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What is an inquiry?

Inquiries occur when someone requests a copy of your credit file. Too many inquiries may be considered a negative factor by lenders thinking of extending you credit, as they may indicate that you are becoming overextended. Inquiries made by companies for marketing purposes are considered promotional inquiries. These inquiries are not shown when another creditor looks at your credit information, and therefore have no impact on your credit rating.

Thinking of using a Credit Repair Agency?

You may want to think again. Generally, "Quick Fix" credit counselors won’t be able to help clear up problems with your credit file. The only solution for genuine credit problems is to pay off your debt on schedule and to wait for negative information to be removed over time. There’s nothing that they can do that you can’t do for yourself, and no one can speed up the process. Beware of companies or services that promise they can fix credit files quickly. They may be fraudulent and expensive. Never, ever, sign a contract or other credit payment plan agreement except with a reliable counseling service. Be very careful about agreeing to debt restructuring plans. They may lower your monthly payments by extending the length of time it will take to pay off all your debts. But these plans can increase the total amount of your debt because the finance charges will add up rapidly. Many people find themselves in much deeper debt after they have restructured debt because they did not understand the terms of their debt consolidation agreements.

Credit Education Specialists

As part of your membership, you may contact our specially trained Credit Education Specialists during our extended business hours. A Credit Education Specialist can help you to understand the information contained in your comprehensive credit profile and Quarterly Credit Updates, answer questions that you may have, and explain the steps to take to dispute information on your profile, if necessary.

Credit tips for homeowners

For many people, buying a new home is the biggest investment they’ll ever make. There’s nothing like owning your own home – it brings you a sense of security and belonging that cannot be found anywhere else. For many people, home ownership represents personal and financial success. Home ownership is also one of the most important goals for many people because of the financial advantages and tax benefits. Interest paid on a home loan and the real estate taxes you pay on your home are among the few major federal tax deductions. It’s also why it is essential to have a good credit rating to qualify for a home mortgage.

Home Equity Loans

A home equity loan can be the most cost-effective form of credit available to you. Home equity loans are backed by the equity you have in your home. The main advantages to a home equity loan are:

You may have access to a larger amount of money.
Interest is usually tax deductible.
You can use your home equity loan for home improvement or other expenses.

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Credit tips for college students

These days, a college education is more expensive than ever before – and costs are rising every year. That’s why many students and families look for financial aid and educational loans. A good credit history is essential for qualifying for one of these loans, which can offer very favorable terms. Once again, it is essential to review your credit history before you apply to make sure the information is accurate and up-to-date. Most universities have financial aid resources that should be thoroughly investigated by students and their families. Even if you do not qualify for financial aid because of high income or assets, there may be other resources of which you can take advantage. Consider an Educational IRA. Implemented in 1998, Educational IRAs offer substantial tax advantages for families, both immediately and when the child goes to college. If you qualify, you can make tax-free contributions of up to $500 per year. There are some restrictions, so please consult your bank or tax advisor for more information. Start saving immediately. College costs have risen substantially in the past few years. Note: Some states have special savings plans if you commit to sending your child to college within the state. Ask your bank or State Representative’s office about them.

Credit tips for job applicants

You expect a bank or department store to look at your credit file when you apply for a loan or credit card. But what if you apply for a new job? Does your potential employer have a right to review your credit file? The answer is, "Yes." Federal law enables potential employers to review a modified version of your credit file, also called an employment report. However, they must first receive your permission in writing to do so.

Who uses employment reports?
Traditionally, the biggest users of credit files for employment purposes are companies in the defense, chemical, pharmaceutical and financial services industries because of the sensitive positions many of these employees hold. Increasingly, however, other industries are using credit files as a general indicator of an applicant’s financial honesty and personal integrity.

What does an employment report include?
It includes much, but not all, of the information about your loans and credit cards that is listed in your credit file. To protect your financial security, employment reports omit your account numbers. Some states specifically prohibit the display of account numbers on employment reports.

What other types of information are on an employment report?
The employment report can help verify information on a job application and provide a clearer picture of an applicant. It also contains data that is relevant to a potential employer. For example, the report lists an applicant’s current employer, his or her financial obligations, public record information (bankruptcies, liens and judgments) and past-due accounts. An applicant’s payment pattern can demonstrate integrity. If the report indicates that personal finances are handled responsibly, the company may assume the individual will handle its financial affairs responsibly, too.

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The Fair Credit Reporting Act (FCRA)

The federal Fair Credit Reporting Act (FCRA) promotes the accuracy, fairness and privacy of information in the files of consumer reporting agencies. There are many types of consumer reporting agencies, including credit bureaus that gather and sell information about your creditworthiness to creditors, employers, landlords, and other businesses.

The FCRA gives consumers specific rights which are summarized below. You may have additional rights under state law.

You must be told if information in your file has been used against you. Anyone who uses information from a consumer reporting agency to deny your application for credit, insurance, or employment—or take another adverse action against you—must tell you and give you the name, address, and phone number of the agency that provided the information.
You can find out what is in your file. At any time, you may request and obtain your report from a consumer reporting agency. You are entitled to free reports if a person has taken adverse action against you because of information in a report; if you are the victim of identify theft or fraud; if you are on public assistance; or if you are unemployed but expect to apply for employment within 60 days. In addition, you are entitled to one free report every 12 months from each of the nationwide credit reporting agencies and from some specialized consumer reporting agencies. You may request your report beginning on December 1, 2004, or on a later date, depending on where in the country you live.
You have a right to know your credit score. For a fee, you may request your credit score. In some mortgage transactions, you will receive credit score information without charge.
You can dispute inaccurate information with the consumer reporting agency. If you tell a consumer reporting agency that your file has inaccurate information, the agency must take certain steps to investigate unless your dispute is frivolous.
Inaccurate information must be corrected or deleted. A consumer reporting agency or furnisher must remove or correct information verified as inaccurate, usually within 30 days after you dispute it. However, a consumer reporting agency may continue to report negative data that it verifies as being accurate.
Outdated negative information may not be reported. In most cases, a consumer reporting agency may not report negative information that is more than seven years old, or bankruptcies that are more than 10 years old.
Access to your file is limited. A consumer reporting agency may provide information about you only to people with a valid need as determined by the FCRA—usually to consider an application with a creditor, insurer, employer, landlord, or other business.
Identity theft victims and active duty military personnel have additional rights. Victims of identity theft have new rights under the FCRA. Active-duty military personnel who are away from their regular duty station may file “active duty” alerts to help prevent identity theft.

For more information, visit www.ftc.gov/credit, or write to: Consumer Response Center, Federal Trade Commission, 600 Pennsylvania Ave. N.W., Washington, D.C. 20580.

* Insurance underwritten by Travelers Casualty and Surety Company of America and its property casualty affiliates, Hartford, CT 06183. Coverage for all claims or losses depends on actual policy provisions. Availability of coverage can depend on underwriting qualifications and state regulations. Coverage not available for residents of New York.