Monday, June 27, 2005

What Is a Fair Credit Rating?

According to the Federal Trade Commission, the Fair Credit Reporting Act (FCRA) "promotes the accuracy, fairness and privacy of information in the files of the nation's credit reporting companies." While the importance of maintaining a satisfactory credit rating is clear, it is also law that the reporting agencies report your information fairly and without bias to their customers. The FTC holds reporting agencies accountable for this task through FCRA.

Function

    A credit rating is an evaluation of an entity's ability to fulfill its financial commitments based on its previous dealings such as billing, payment and debt history. The entity can be you, an organization or even a country. Credit ratings show credit worthiness for purposes of loans, mortgages, employment and even eligibility for government licenses. Credit ratings must be fair and accurate representations and should conform to the rules laid down by the Fair Credit Reporting Act.

Types

    A credit reporting agency, or credit bureau, issues your credit rating via a credit report. There are two types of credit reports: a consumer credit report and an investigative report. A consumer report contains information regarding financial activities such as bank accounts, existing and loans, mortgages and credit usage. An investigative credit report contains information based on personal interviews and includes information such as criminal history, life style and reputation. Credit agencies are careful to verify the accuracy of the information they provide, but you must also verify the information in your file to protect yourself.

Rights

    The Fair Credit Reporting Act lays down certain rules to ensure the presentation of accurate information and the right to privacy. For example, you have the right to a full disclosure of your credit report and credit score. You also have the right to dispute, remove or correct any incomplete, unverified or inaccurate information. You are further entitled to know when entities deny your applications based on information in your credit report.

Considerations

    Always arm yourself with knowledge of FCRA when applying for and using credit, and even when applying for employment or buying insurance. If creditor denies your credit application, for example, under the Equal Credit Opportunity Act, the creditor must give a valid reason for denying your application. If the credit reporting agency violates FCRA rules and treats you unfairly because of this violation, you may sue the credit reporting agency for violations of the FCRA; you may receive compensation for damages and your attorney's fees if you win. Report all violations to the Federal Trade Commission.

Warning

    The Fair Credit Reporting Act allows credit reporting agencies to display negative information, including lawsuits, on your consumer credit report. Agencies can display such information for as long as seven years. Credit agencies can report information regarding bankruptcies for up to ten years and can display criminal convictions indefinitely. Entities with a "legitimate business need" as defined by the FCRA can gain access to your credit file. Legitimate business need includes extension of credit, employment or even issuing bank accounts and extending home utility services.

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