FAQ on Credit Agencies

A few companies control almost all of the consumer credit rating industry, which covers about 75 percent of all Americans. The credit rating agencies cannot approve anyone for credit and the agencies themselves are dependent on lenders for data about consumers. They also often have wrong data on their reports.

Who are the "Big Three"

Experian, Equifax and TransUnion are the major players in the credit rating industry as of 2011. The three bureaus collect data on consumers and produce credit reports. These reports are the basis for a credit score, which helps lenders to determine the risk of lending to a particular borrower. The traditional credit score is based on a model developed by the Fair Isaac Corporation in the 1970s and 1980s called the FICO formula. The Fair Isaac Corporation licenses its formula to the agencies but does not rate consumers itself. While the three credit agencies continue to use this score, they have also developed their own scoring system, called the VantageScore. VantageScore and FICO use similar information but produce a different range of scores. Some alternatives to the "Big Three" exist, using self-reported data and data not used by the major bureaus, such as utilities and banking history. Alternative scores, however, are not as widely used as the FICO.

What do the Agencies Do?

The credit agencies are essentially a central database of financial data for anyone with a credit history. When a lender reviews an application for credit, it can query all three agencies or just one or two for information on a customer. Lenders make all credit decisions and their standards can vary widely, so it may pay to shop around.

Where Do Agencies Get Their Information?

Most of the information stored in credit agency databases comes from lenders, such as the size of a loan and payment history. Some information, such as demographic information like job and address, comes from what the applicant puts on a loan application. The agencies also scour public databases for public judgments such as tax liens, bankruptcy and foreclosure. The FICO model assigns a weight to each item based on factors like how long a person has had credit and any negative items on the report.

What if an Agency has False Information?

Eighty percent of consumer credit reports have at least one error, according to Bank Rate. If you find something wrong with your report, the credit agency that receives your complaint must investigate the claim within 30 days. All three agencies have online dispute resolution forms.

Do The Agencies Have to Let Me See My Score?

The credit rating agencies have to provide one free credit report each year to every consumer, but this does not include the FICO score. Also, the only way to get a free report is going through the AnnualCreditReport.com website. Other websites are either bogus or try to charge an extra fee.

Read More

What Is the Most Accurate Credit Scoring Tool?

If you want to know your credit score, you may be surprised to learn that different companies will provide you with different scores, depending on the credit scoring tool used to calculate the score. All credit bureau-related scoring tools, however, are accurate for their intended purpose.

Types

The two main types of credit scoring tools are the formula the credit bureaus use to calculate FICO scores and the one they use to calculate consumer credit scores. Specialty credit scoring tools also exist, such as the tool credit bureaus use to provide Auto Industry Option scores or to calculate a bankruptcy risk score.

Facts

The accuracy of a credit scoring tool depends on the purpose for which the credit score is used. An Auto Industry Option score works well for a car dealer who plans to finance a vehicle purchase, but is all but useless to a mortgage lender.

Function

Consumer credit scores are provided to individuals to help them understand their creditworthiness. FICO scores and bankruptcy risk scores are used by mortgage lenders and credit card companies to see how likely a consumer is to make regular payments or file for bankruptcy. The Auto Industry Option scoring tool provides a credit score to car dealers based on a consumer's history with vehicle loans.

Considerations

FICO scores and consumer credit scores may differ depending on the bureau reporting the score, but this has no bearing on the accuracy of the scoring tool. Discrepancies in credit scores are the result of information contained within each bureau's credit records.

Warning

Third-party credit reports purchased from any company other than the credit bureaus or myFico.com contain estimated and often inaccurate credit scores because the scoring formula used by the credit bureaus is kept secret.

Read More

How Does Closing a Credit Card Account Affect Credit History?

Overview

Credit Card Types

Closing a credit card account does have an effect on your credit history, but this depends in large part on the type of credit card account. Sometimes closing the account can have a negative effect, sometimes a positive one--many different factors are at play.

First, major credit cards are better for your credit score than smaller, department store credit cards. Having a major credit card for some length of time with a fairly high credit limit is usually seen as a positive sign. The trouble comes when you decide to close that account. A general rule of thumb is that if it is your oldest credit card account, you should keep it. Closing out your oldest account makes your credit history look more dubious on paper. A shorter credit history is more risky than a longer one (in many cases), and lenders will frown at a shorter history.

It should be noted that closing the account does not remove its appearance on your credit report--the history will remain, though it will only last for a few years after that account has been fully paid off.

Closing Paid and Unpaid Accounts

Of course, closing an account without fully paying it off is even worse. Then you have money still owed on the card without a card--which looks like bad debt, and will negatively affect both your history and your score. You should always make sure that the account is fully paid off before you close it.

Many people wonder if closing a credit card account will help their credit history or make it look better. Usually, the answer is no. If you have many different credit accounts, a lender may feel uneasy about loaning you money, and in that case closing a few can positively affect your credit. But most people do not struggle with too many open accounts, and in this case closing an account does not have a positive effect on credit reports.

It also does not affect your credit score to have the account closed by the lender. Whether you or the lender close the account, the score effect is the same. The credit report, however, will note which party closed it, and some lenders do pick up on that with closer examination.

Utilization

Another reason lenders give for keeping credit card accounts open is the figure known as your utilization percentage. This is a ratio of how much "credit" you are using in relation to how much you have--it compares the balances and limits you have on your cards in total. This becomes a problem if you owe money on one or more credit cards and are closing out an account that is fully paid off. In effect, this drops your overall credit limit and raises your utilization figure, making it look like you are using a much greater percentage of your possible debt--another sign that raises red flags for some lenders.

Read More

Key Credit Score Information

Most lenders use the Fair Isaac and Company or FICO score to determine your overall creditworthiness. Your score is expressed numerically from 300 to 850--with 850 being the best--and takes several factors into consideration. Generally speaking, the higher your score, the less likely it is--from a statistical perspective--you will default on your loans. If you are concerned with building up your credit score to have the best possible chance of obtaining favorable financing, consider the five critical factors FICO uses to calculate your score.

Payment History--35 Percent

When it comes to your creditworthiness, lenders are most concerned with your ability to service your outstanding balances in a timely and effective fashion. Late payments and other delinquencies carry significant weight when calculating your credit score. If you want to improve your credit score, make your payments on time and avoid falling behind, repossessions or writing off balances--these are major red flags to creditors and have significant downside effects on your credit score. If you have a history of late payments, making an immediate change in your behavior will help tremendously. FICO gives more weight to your payment history over the past 12 months than it does from times prior to that.

Debt Utilization--30 Percent

Creditors get nervous when you have fully tapped out your borrowing capacity and available credit lines. This means you have borrowed to the maximum allowed and statistically, your chances of default are higher if you encounter a drastic change in your income. It is important to use your available credit to establish a credit history, but if you are maxing out your lines, it will reflect poorly on your credit score. Paying down balances and accepting higher credit limits when awarded will help improve this component of your credit score.

Credit History Length--15 Percent

The longer you have had credit, the better it reflects on your credit report and score. If you rarely or never use the first credit card you received several years ago, consider making a small purchase on the card just to keep the account active. If your oldest credit account is closed, your credit history length will be reduced to reflect your second oldest, active account. Lenders like borrowers with longer credit history as it provides greater insight into the consumer's behavior versus someone that just opened 10 new accounts in the past week.

New Credit Inquiries--10 Percent

Each time you apply for new credit or request a credit line increase, an inquiry is made to your credit account. Similar inquiries may also be made when renting an apartment, applying for a job or opening a new bank account. If you like to apply for each credit card you receive an application for, you may rack up an unnecessary amount of inquiries that can have a slight drag on your credit score.

Other Items--10 Percent

Creditors like to see a broad mix of credit accounts, including credit cards, mortgages and other installment loans such as automobile loans. If you only have a home mortgage, applying and getting approved for an unsecured credit card can ultimately improve your score. However, applying for different types of credit just to maximize this component of your score is not advised.

Read More

Should I Pay Collection Accounts to Improve My Credit Rating?

Yes, It Improves Your Credit Score

Paying off accounts that have gone into collection does improve your credit score as of 2008, according to Bills.com. Previously, paying off collections hurt your scores because a payment would make the debt look like it recently become delinquent.

It Could Hurt Your Score

According to Liz Weston of MSN Money Central, some unscrupulous collection agencies can hurt your credit score by making charged-off debt look newer than it really is, even though changes to the FICO score formula mostly curtailed this phenomenon. Negotiating debt for less than the original amount owed can also cause a recent negative entry that lowers your score.

Bottom Line

Paying your past due debts usually benefits your score, except in certain situations and the manner in which the lender handles reporting to the credit reporting agencies, according to Bills.com. Regardless of your score, paying off past-due accounts looks good in the eyes of lenders because it shows a commitment to paying off debt.

Read More

Do Federal Tax Liens Affect Credit Scores?

A federal tax lien may not be the most damaging item you can have on a credit report, but it can last far longer than any other item in a credit history. Unlike most other items on a credit report, you can remove a tax lien just by paying it. You can even remove the tax lien before paying the entire bill.

Identification

A federal tax lien is one of the deadliest items that can appear on your credit report. While the impact of a tax lien depends on the other factors in your credit report, such as the presence of negative accounts and debt loan, a lien usually takes off over 100 points on a credit score. For consumers with a score of 780 or above, the lien can damage their rating by 150 points or more, according to Jeanine Skowronski of Mainstreet.

Time Frame

A paid tax lien stays on a credit report for seven years, but the Fair Credit Reporting Act allows the national credit bureaus to report an unpaid tax lien indefinitely. As of 2011, TransUnion and Equifax report unpaid tax liens indefinitely, but Experian only lists them for 15 years. Some states place tougher restrictions on the reporting of tax liens. For example, California limits the federal credit reporting time period to 10 years for unpaid liens.

With Tax Lien

As of February 2011, the Internal Revenue Service (IRS) withdraws tax liens when the taxpayer pays a lien in full. However, the IRS does not automatically withdraw a paid tax lien. You must file Form 12277 Application for Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien. You must attach a copy of your federal tax lien and documentation that proves you paid your lien, such as a receipt from the IRS.

Tip

You can request the IRS withdraw the tax lien as soon as you make an installment agreement with the IRS in lieu of paying the bill in full. However, the installment agreement must eventually repay the debt in full. Also, the IRS only agrees to an installment plan if you only owe tax for one year. You may not receive an installment plan if you owe more than $25,000 in taxes. For tax debt less than $25,000, you can request an installment plan at the IRS website.

Read More

The Anatomy of a Credit Score

Whenever you try to borrow money or open a credit account, your lender uses a number called a credit score to help determine how risky you are as a borrower. If you have a low credit score, the lender may refuse your loan request or charge you a higher interest rate than if you had a better credit score. Credit scores are calculated based on credit information that falls into several categories.

Payment History

Your track record of making payments on your debts is the most important factor in determining your credit score. According to the Fair Isaac Corporation (FICO), your payment history makes up about 35 percent of your credit score. If you miss debt payments or have late payments on your credit history, your credit score will tend to be lower than if you never miss a payment.

Debt Level

The amount of debt you carry is the second most important component of a credit score. Quicken Loans says your total debt makes up about 30 percent of your credit score. When you carry high levels of debt, you are more likely to miss payments. High balances on credit cards may be especially detrimental to credit scores, because credit utilization -- the amount of debt you carry relative to your credit limit -- plays a role in determining a credit score. Using a low percentage of your available credit to produce a low credit utilization ratio helps boost your credit score.

Length of Credit History

The length of your credit history is another factor that influences credit scores. Younger borrowers who do not have a proven track record of handling debts are considered riskier than older borrowers with many years of credit history. FICO states that the length of your credit history is responsible for about 15 percent of your credit score.

Access to New Credit

Gaining access to or requesting new credit can impact your credit score. When you get new credit, lenders cannot be sure that you will use it responsibly, so opening new credit accounts tends to lower your credit score. If you use accounts responsibly by keeping low balances and making payments on time, the negative effect of new credit tends to diminish over time. New credit makes up about 10 percent of your credit score.

Credit Mix

The types of credit accounts and debts you have make up the final 10 percent of your credit score. According to the Consumer Federation of America and FICO, carrying a diverse mix of credit and debt, such as credit cards, a mortgage, retail accounts and installment loans, may improve our credit score.

Read More