Personal Credit Rating System Problems

As credit reports and credit scores become more embedded in the social consciousness of consumers, the personal credit rating system is more important than ever. We've never known more about the formulas that determine whether we'll get approved for credit and what kind of rates we'll get, which is both a blessing and a curse. While we can now build our credit around the metrics used by the banks, we can also see the flaws inherent in the system.

Credit Rating System

Today's most prominent personal credit rating system, the FICO score, takes into account five major factors from our credit reports. Of the five, the most important is your history of paying on time, which counts for more than a third of your score. Your level of debt in relation to your credit limits comprises 30 percent of your score, the age of your accounts is another 15 percent, and your mix of credit types and the number of inquiries on your credit report each count for 10 percent. The end product is a number that gauges the level of risk that you'll faithfully repay your debts to your creditors in a timely manner.

Predatory Credit Score Merchants

One huge problem in today's credit world is that, while you can get your credit report for free, you have to pay for a credit score that tells you how your credit really stacks up. This becomes problematic when you consider the many companies that try to hook you in with a "free" credit score, only to charge you for a monthly credit monitoring service you don't want. Worse, these companies don't sell FICO scores; instead, they sell their own scores using their own metrics, which may or may not line up well with your FICO score. As a result, you could end up getting charged upwards of $15 a month for a score that isn't even accurate.

Credit Score Composition

Another drawback of the personal credit rating system is the priority it places on your mix of credit-based accounts. In essence, the credit system rewards you for having huge debts like mortgages, auto loans and student loans. One could argue that this is in the best interest of the banks, as it allows them to collect huge amounts of interest while simultaneously patting the backs of their customers. The idea behind the credit mix is that banks want to see how you can handle a big monthly payment; however, some consumers are so obsessed with their credit scores that they carry balances on their cards just so they can have a better credit mix.

Credit Repair

With credit being such a huge issue in today's world, it's no wonder there are so many companies focused solely on helping people repair their credit ratings. However, what should be a benevolent industry is instead quite shady. Credit repair companies and debt settlement companies have come under fire from the Federal Trade Commission for taking the money of customers and providing nothing in return. Meanwhile, credit counseling agencies, which are seen as more legitimate, are largely owned by the credit card companies. It can be hard for customers to tell if any of these groups have their best interests at heart, leading people to neglect the help they so desperately need to get their credit fixed.

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What If There Is An Error In Your Credit Report?

Under the Fair Credit Reporting Act, FCRA, you have rights as a consumer that entitle you to accurate reporting of your credit history. Both the credit reporting agency and the entity providing information about you are responsible for the accuracy of the information on your report. The Federal Trade Commission, or FTC, is the federal agency tasked with enforcing the FCRA, and can provide some assistance in correcting errors on your credit report.

Write the Agency

The first step to take if you identify an error on your credit report is to inform the reporting agency, in writing, disputing the error. Include with your letter a copy of any documents that supports your contention that the report is in error. An error may be the amount due on an account, details about late payments or delinquent accounts, or charges you never made. There may be one or more errors in your report, in which case it may be helpful to include a copy of your credit report with individual items with mistakes circled. You should also obtain your report from the other major reporting agencies to see if they've duplicated the error.

Investigation

Under federal law, the reporting agency has 30 days to investigate the charge once it receives your letter unless it is clearly a frivolous claim. In doing so, the credit reporting agency will contact the creditor providing the information and attempt to ascertain the facts. The credit reporting agency must provide you with a copy of its findings along with the name and address of the relevant information of the providers. The agency must also provide a free copy of your credit report if the error is corrected, and reports for up to the previous six months upon request.

Write The Creditor

Even though the credit reporting agency will contact the creditor, you should not wait to contact them yourself, in writing. Send a letter similar to the one you sent to the reporting agency disputing the charge. This then forces the creditor to report your dispute of the charge to any reporting agency to which it provides information. Include with your dispute letter copies of any evidence you sent to the reporting agency. If the creditor determines that the disputed information is in error, it must submit a report to all three major credit reporting agencies.

Identity Theft

If the error on your credit report is a charge you didn't make, it may be a sign of identity theft. If you suspect you've been the victim of identity theft, you should immediately call the reporting agency and place an initial fraud alert on your account. This will trigger all three major credit reporting agencies to send you a free copy of your credit report. It will also prevent anyone from opening a new line of credit in your name for 90 days, but won't prevent usage of existing accounts. You may have to close down an account that has been tampered with and file a police report. Filing an identity theft report with the FTC can facilitate the process with the police.

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How to Dispute the Validity of a Credit Report

Your credit history has a direct effect on your financial health. Having negative items on your credit report, such as late payments, charge-offs and collection accounts, can bring down your credit score and make it difficult for you to qualify for a new credit card or loan. Even worse, the credit bureaus who keep a record of your credit history can make mistakes, giving you a negative rating you do not deserve. By law, you have the right to review your credit report and dispute inaccurate information.

Instructions

How to Dispute a Credit Report Through the Mail

1

Order a copy of your credit report from each of the three major credit bureaus. By law, you can order a copy of your credit report from TransUnion, Equifax and Experian free once a year through Annual Credit Report.

2

Print a copy of the credit report.

3

Review the credit report carefully and circle any errors, including accounts reporting inaccurate information and accounts that do not belong to you.

4

Write a letter to the credit bureau indicating that you wish to dispute the information. Be as detailed as possible when explaining the error.

5

Gather any documents to support your dispute, including copies of paid bills or written letters between you and the creditor.

6

Attach your documents and a copy of your credit report to the back of your dispute letter. Mail the dispute letter certified mail.

How to Dispute a Credit Report Over the Phone

7

Contact the credit bureau that reported the error and inform them that you wish to open a dispute.

8

Provide the customer service representative with a detailed explanation of why you are disputing the information. Ask the representative for her full name and extension. Write the down the date and time or your call as well as your claim number and the name and extension of the representative.

9

Contact the credit bureau 30 days from the date of your original call and verify that they have conducted an investigation. By law, the credit bureau must investigate your claim and remove or correct inaccurate information within 30 days.

How to Dispute a Credit Report Online

10

Visit the credit bureau's website and click the link to file an online dispute.

11

Enter in the requested information in every text box on the online dispute form, being as accurate as possible.

12

Press "Submit" to start your online dispute.

13

Contact the credit bureau in writing or by telephone if you have not received a response within 30 to 45 days from filing your dispute.

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How Can I Get a Credit Report on a Person Who Is Not My Relative?

Creditors use credit reports to help determine if someone is a good candidate for a loan or other form of credit. Every person who has ever used credit has a credit report, and while you can look at your own report for free once a year, you cannot look at someone else's report without permission. You cannot even view your spouse's credit report unless you have legal permission, and looking at a non-family member's report is no different.

Instructions

1

Ask the person for a copy. The easiest way to look at someone else's credit report is to have that person get his own report and give it to you, or give you a copy. Everyone is entitled to a yearly free copy of his own credit report, and can easily obtain it by going to AnnualCreditReport.com, the only site authorized by the Federal Trade Commission to provide your yearly report.

2

Get written permission from the person whose credit report you wish to inspect. The document notifies the person that you intend to check the person's credit report, asks for particular information such as the person's social security number, birthday and address, and asks for the person's signature and permission to inspect the report.

3

Contact a consumer credit reporting agency. There are three consumer credit reporting agencies that maintain consumer credit reports: Experian, TransUnion and Equifax. You can contact these companies through the mail, phone or online vie their individual websites.

Equifax

P.O. Box 740241

Atlanta, GA 30374

1-800-685-1111

equifax.com

Experian

P.O. Box 2002

Allen, TX 75013

1-888-397-3742

experian.com

TransUnion

P.O. Box 1000

Chester, PA 19022

1-800-888-4213

transunion.com

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Free Credit Score Online & No Credit Card Required

A credit score is a three-digit number that represents your creditworthiness based on information in you credit report. While it is impossible to calculate your credit score yourself, you can manage whether your credit score increases or decreases each month. You can obtain a free copy of your credit report once a year through AnnualCreditReport.com to monitor your credit-related axctivity, and you can order your credit score for a fee or, in some instances, for free.

Trial Memberships

Sometimes you can obtain a credit score free as part of a trial membership to an online credit monitoring service. These trial memberships may last from seven to 30 days, and they require you to provide credit card information. Keeping track of the cancellation terms and periods can be difficult, and if you forget to cancel the membership before the trial period expires, you will be charged a fee. Instead, you can find a free credit score service provider that offers your score without a credit card.

Free Credit Score

Free credit score resources online are scarce, but they are available with research. Websites such as Credit Karma and Quizzle provide you free credit scores in exchange for your personal information. However, no credit card is required to create an account. Both websites also offer credit monitoring services at no additional costs. Email alerts are sent each month to notify you of changes to your credit score and remind you to login to check your account. While less sophisticated than credit monitoring services offered by the three major credit bureaus, basic credit monitoring offered by free credit score outlets helps you manage your credit rating over time. These websites do not replicate the FICO credit score, which is the one used by most lenders, but they provide a credit score that is similar.

Alternate Resources

In addition to free credit monitoring services, applying for a installment loan online is another way to learn your credit score. One disadvantage to learning your credit score this way is that your credit score decreases with new credit inquiries, which occur each time a lender checks your credit report. An installment loan, such as a mortgage or car loan, is a loan repaid in increments until the balance reaches zero. When you apply for preapproval for such a loan, you receive an acceptance or denial notice that often includes your credit score. The credit score is included to explain the interest rate quoted for the loan.

Considerations

Free credit score monitoring is available to help you better manage your credit rating. Though credit cards are not required when ordering your credit score from a free service, your Social Security number is usually required. Your Social Security number is used to verify your identity and ensure you receive the correct credit information. To ensure accuracy, order your credit score from multiple free outlets and compare your results. Credit scores won't be exact matches, because they don't always come from the same credit bureau, but each score should be fairly close.

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How Much Does Your FICO Score Change Once a Charge Off Has Been Taken of Your Credit Report?

Charge-offs can do serious damage to your credit score, so getting them removed is an important step in improving your credit. Once removed, you should see an improvement in your score, though the extent of the improvement depends on other factors, including the age of the debt.

Credit Scores

A credit score is a number that represents your financial history, particularly your use of credit. A higher credit score indicates a history of responsibly using of credit. There are several different formulas used to develop credit scores, though the best known is the one developed by the Fair Issac Company (FICO).

Charge-Offs

If a creditor believes that you are not going to pay a bill, it will eventually "charge-off" your account as a loss. In most cases, the creditor will write your bill off as a tax loss and either assign or sell your account to a collection agency. The creditor also reports the account to the credit bureaus as a charge-off, which will lower your credit score. Even though your account is "charged-off," you still owe the money. Many lenders, particularly those that specialize in mortgages, won't issue you a loan until you either pay off a charged-off account or get it deleted from your credit reports.

Credit Report Deletions

If you have a charge-off on your credit report and you do not believe that the account is yours or that you actually owe that creditor money, initiate a dispute with the credit bureau that is reporting the charge-off. If the account is yours, contact the creditor about getting the debt paid off. You may be able to get the charge-off removed from your account if you agree to pay off the debt. Charge-offs will drop off your credit report after 7.5 years passes since your last payment on the account. However, federal law allows credit bureaus to include old accounts on reports requested by lenders, insurers and employers if you are asking for an insurance policy or loan over $150,000 or a job that pays more than $75,000 per year.

Impact of Deletion

While a charged-off account can initially lower your credit score by 50 to 100 points, your score may not suddenly jump up 50 to 100 points right after a charge-off deletion. This is because there are several factors that make up your credit score, and some areas of your credit may have improved or worsened over time. The debt's age also matters: If you get a very old charge-off removed from your report, don't expect to see a huge change in your credit score, as the impact of old negative accounts lessens over time.

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Which Credit Score Do Lenders Use?

A credit score can determine whether you get a loan and affect other aspects of your life, such as getting a job, but not all credit scores are the same. Most lenders use the same formula to calculate your credit score, but they rely on information gathered by a third party. However, there are several alternative scores lenders can consult.

Identification

As of 2010, most lenders use a credit scoring formula developed by the Fair Isaac Corp., according to Kiplinger. The FICO score is so common among lenders that credit scores are often synonymous with the FICO model. Each of the three credit reporting agencies, however, have different information and scores can vary by several dozen points.

Variations

The Fair Isaac Corp. updates the FICO formula every few years. In 2009, for example, the latest FICO version was 08 and it would give a much different score than a lender using the FICO 98 formula, according to Consumer Reports. FICO also has scores based on niche needs, such as a formula designed for lenders who specialize in car loans.

Misconception

Credit rating bureaus may try to sell you their own credit scores, such as the Experian ScoreX or TransUnion TransRisk, according to credit expert Michael Bluejay. The real FICO score sold by credit rating agencies also go by different names. Equifax calls the FICO score a "BEACON," Experian the "Experian Score" and TransUnion the "EMPIRICA," according to the Fair Isaac Corp.

Creditors typically use credit reports from all three ratings agencies and consider your median score your true FICO score.

The Future of Credit Scores

All three credit bureaus -- which control almost the entire consumer credit rating industry -- started backing the VantageScore developed by these same credit bureaus in 2006, according to MSN Money Central. The VantageScore claims it gives consistent scores, while weeding out more bad borrowers than the FICO model. The FICO model, for instance, can give high scores to borrowers with a limited credit history.

As of 2010, there is not enough information to determine whether the VantageScore will supersede the FICO. Only 5.4 percent of lenders chose the VantageScore model between 2006 and 2009, according to Bankrate.

Other Alternatives

Many companies, such as Ford, use credit scoring formulas they create themselves, according to Consumer Reports. Banks sometimes purchase a credit history and calculate a score themselves. Some lenders look at scores from companies that report payments not traditionally included in credit reports, such as rent and utilities.

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