YOUR CREDIT REPORTS

Did you know you have lots of credit reports? Why are there so many? Are the "free" ones any good? How do you get copies of the "right" credit reports? How do you fix a credit report?

We are exploring some of the data from my book about credit (see previous article, below). This article is about your many credit reports, themselves.

INTRODUCTION
Now it is time to make a transition from the “philosophy” of credit to the “mechanics” of it. Fortunately, somebody else will assemble all of the information for you, but it is still up to you to constantly review those reports and make effective changes as needed.
The next few chapters have the potential to change your financial life. This information is vital to your monetary success. It is simple but not easy. It takes knowledge and effort. Please believe me when I tell you that the people who employ these lessons enjoy very productive and satisfying economic lives.

THE GUTS
By understanding some of the specifics that lead to our credit score, we can make this dynamic tool serve us for all the rest of our lives, rather than the other way around. To begin with, let’s observe how much emphasis is lent to the various aspects of the reports themselves.

Recent Payment History – 35%
The single most important factor in determining your score is Recent Payment History. Any recent late-payments or on-time payments are weighted more heavily than those of years gone by.

Length of History - 15%
This category is different from the one above because it is concerned with how long this person has been managing his/her credit. Obviously longer is better. When combined with the previous category, we can see that fully one-half of our reports are based on our history, in one way or the other.

Amount of actual debt - 30%
Oddly, a lack of debt can actually lower a person’s credit score. That is because it is difficult to determine if this person actually knows how to handle credit at all. On the other hand, the person who rings up a bunch of new debt also appears risky. The trick is to slowly and consistently accumulate available credit without ever owing more than about 30% of the available amount.

New credit – 10%
It is an ironic fact that new credit diminishes our credit scores while our older and established credit enhances them. The obvious question is, “How the heck are we going to get solid established accounts if we don’t start out with new accounts?” The answer is, “You can’t.”

Type of credit - 10%
This part of the score is based on types of credit in use (retail, finance company, mortgage, auto). Short-term unsecured debt generally carries more risk than secured loans like real estate mortgages.

WHO ARE THOSE GUYS?
One of the all-time classic movies is Butch Cassidy and the Sundance Kid. In it, Paul Newman and Robert Redford are a couple of lovable bad guys who just can’t get away from the grasp of the relentless authorities. After all sorts of running and frustrations, an exasperated Butch (Newman) turns to Sundance (Redford) and gasps, “Who are those guys?”

In a similar way, you and I are to be forever pursued by a gang of determined credit reporting agencies. The primary gang members are Equifax, TransUnion and Experian. They are not affiliated with the government and they operate to make a profit by selling their products and services. There are many other members in the gang, who also gather and sell information on credit matters. There is even a company called Payment Reporting Builds Credit, Inc., which allows the public to report their own payments for items which are not customarily included on the reports of the better known credit bureaus (phone, cable, rent).

All three major bureaus provide a credit report and TransUnion provides two different types. No two reports are identical. Equifax and TransUnion offer FICO scores which are used in more than 75% of all loans. Mortgage companies review both FICO reports in their lending decisions, but other creditors (credit card, auto loans, retailers etc.) usually prefer one or the other and tend to rely almost exclusively on that particular one.
Experian and TransUnion each have a separate internal report and score. They aggressively try to market these own internal products, presumably because there is more profit in it. Equifax has no such alternative report.

Auto dealers have their own secret scoring system. They use a FICO Auto Industry Option Score. Once again, the scoring is similar to that of the standard FICO score, but they look more closely at how you handled previous auto loans. If you have had other financial problems, but always handled your debts regarding your auto loans properly, you might actually get a lower rate on an auto loan than you would have suspected. On the other hand, there is nothing stopping a dealer from reviewing your entire credit situation and then using other bad credit against you anyway.

Certain other industries have their own alternatives to the FICO system for their types of loans. They are called Non-auto Installment Industry Options. They include Bank Cards and Installment Loans (furniture, electronics etc.). These lenders treat their scoring system similarly to the auto dealers, with extra weight given to the items on your report that relate to their particular products.

CALL TO ACTION
You are entitled to one free consumer report from each of the major bureau every 12 months. You can get them at www.AnnualCreditReport.com. However, those reports do not provide the FICO score, which is what you really want because so many creditors use those particular scores.

You can also purchase three-in-one or “merged” reports, but I don’t recommend them either for several reasons: Too few creditors use them; they are expensive; and they are more difficult to read.

That brings us back to the FICO reports. The only way to obtain your FICO reports is to purchase them, so I recommend that you purchase copies of your TransUnion and Equifax FICO scores. They cost less than $20 each. You can get them at www.MyFICO.com/12.

As stated earlier, Experian no longer offers FICO scores so they only have a non-FICO report. However, you might want to get their report anyway, just to be certain it does not have any damaging information that you should know about.

Important: Regardless of your financial condition, I suggest you stop everything else and go order your exact FICO scores RIGHT NOW! You will have them on-line within minutes and you can print them out if you wish. Then you will be able to begin improving your credit score by implementing the recommendations in the next chapters. But do not put it off. There is no benefit in waiting. Go ahead, I promise to wait for you.

Remember, you want the FICO scores from TransUnion and Equifax (here is the website again (www.MyFICO.com/12). The non-FICO score from Experian is optional.

THE PAYOFF
Once you obtain your FICO reports, you can determine who has been checking you out. You will also look for errors you can correct and what areas need improvement. You will find out if you have been a victim of identity theft. You can verify if your lenders have been reporting your good behavior. Be sure to check all current accounts and verify accuracy. You will probably notice that the reports do not all have the same accounts listed. You will want to notify them of any good accounts you have that might be missing on their reports.

You will observe several rows of tabs running across the top of your report. Notice the row with tabs numbered one through nine (1-9). You should review all of these sections.

NEGATIVE REASON CODES
Click the tab marked “Understanding Your Score” (Number 2). This could easily be the most critical section of your reports. You will have up to four very specific things you can work on to improve your own particular credit score. They are listed in order of how important they are to your score, and they will tell you what to do about it. Begin fixing them, in order of importance. For example, if you have too much debt for the credit you have available (too high of a balance on your cards), you know to pay down your cards or increase your available credit.

INQUIRIES
Click the tab marked “Inquiries” (Number 6). Here you will discover who has been checking you out. If you do not recognize their names, you may need to perform a web search. For instance, my life insurance company does their investigating under a name I did not know.

In many cases, but not all, these inquiries can pull down your score, so keep an eye on this section. Generally, an inquiry by anybody who just wants to learn if you are responsible or not (insurance companies, employers, etc.), will not hurt your score. But, when you have applied for credit or somebody is looking to extend credit to you, your score is vulnerable.

If you see inquiries in that latter group, which you did not authorize, you should send then a letter and demand that they either prove they had a “permissible purpose” to investigate your report, or remove their inquiry.

BECOME YOUR OWN ADVOCATE
Click the tab market “Accounts” (Number 5). The specific information provided in this section will enable you to see if there are any accounts you can improve or upgrade. For instance, one of my credit cards accounts showed my unpaid balance, but it did not show how much available credit I had; so, it appeared I was using all of my available credit, even though I was only using 5% of it.

Verify the information for all of your accounts. If you find negatives on your report, you can dispute them for any reason. If you had an unfair bill that you refused to pay, but now it shows up as a collection account, you can write a letter to the bureau involved and dispute the charge as “not yours”. They are obligated to verify with the creditor that the entry is legit. Sometimes they are unsuccessful in contacting the creditor or getting a timely response, in which case, they are required by law to remove the negative comment from your report. If the creditor reaffirms the information, the bureaus will not modify your report unless they made some error of their own. They will notify you of their findings and make changes where appropriate.

Your next step, and best bet, is to go directly to the source of the problem. That means the lender or creditor (not a collection agency). Send a certified letter to whoever is authorized to review such matters. Do your homework and provide any documents that support your case. Remain civilized. Be sure to tell them exactly what you are asking for; “I would like you to withdraw the account from the collection agency and correct all three credit reports.”
Many lenders/creditors will grant one such correction per year as a gesture of goodwill. Sometimes they will even erase several old blemishes if you have a solid year of on-time payments. If they agree to your request, be sure to verify with all of the bureaus that they made the corrections.

DOES NO REALLY MEAN NO?
Just because you get turned down is no reason to give up. Wait a few months and try again. There are all sorts of examples of creditors removing bad marks after repeated requests. They find the small accounts, the old accounts and the ones with similar names are just not worth fighting over. Sometimes they change their minds or put a new person in charge or just don’t care enough to keep fighting. So stick with it. If you are still unsuccessful after several attempts, you can hire a credit repairing expert or an attorney to take up the battle. If you are serious about cleaning up your credit reports, this is worth the time and money.

COLLECTIONS AND PUBLIC RECORDS
Collections are accounts that have been turned over to collection agencies. I suggest you discuss these account with the lenders themselves and not the collection agencies. If you get an inheritance or a nice raise, and if you are willing to pay a substantial portion of what you owe, they may be willing to remove the accounts from collection status. If so you should see a good improvement in your score.

Public Records indicate any relevant legal proceedings. This includes judgments, bankruptcy, foreclosures, repossessions, tax liens or garnishments. Most of them will stay on your report for 5-10 years, but a tax lien will remain as long as it is unpaid.

OTHER TABS
Be sure to check out the remainder of the numbered tabs. There may be specific issues you can work on to improve your score.

IS IT WORTH THE BATTLE?
When it comes to your final FICO score some of the errors on your reports matter much more than others. In fact, some of them don’t matter at all. Generally, your time is well-spent if you are disputing things like late payments, collections, accounts listed as anything other than “Current’ or “Paid as agreed”, as well as any credit limits that are reported as lower than they should be, charge-offs, anything that is negative and not yours, any negative comments that are more than ten years old, and any accounts that were paid off or written off in a bankruptcy but still show up as unpaid.

Most inquiries are relatively harmless unless there are a bunch of creditors like car dealers and unfamiliar banks snooping around. If you see inquiries like that or accounts that don’t make sense, you may be the victim of identity theft. In that case, notify the fraud departments of the credit bureaus and they will tell you what to do from there.
Most other mistakes such as an incorrect spelling of you middle name or the address of your employer or who closed an old account should be updated, but they don’t usually play any role in your score.

CONCLUSION
Finally, your score will be constantly changing so you should regularly obtain new updated copies of your TransUnion and Equifax FICO scores. If you discover more than a handful of mistakes on your report, you may need to get an updated report once every quarter for the first year. Once you have things cleaned up, I suggest once every six months after that. Get the free Experian score once per year.
I suggest you establish a tradition or HABIT of an annual review on your birthday or new yeas or tax time or some other trigger-date that will be easy for you to remember.

Now that you have your credit reports in hand, you are ready to learn the secrets of building a much better score. We will discuss that next time.

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