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Credit Reporting

An overview of credit reporting

In their efforts to evaluate consumer credit worthiness, creditors depend on credit reporting bureaus to supply reports that provide more specific consumer information. Most creditors have automated systems that allow them direct access to credit reports from the different credit bureaus. Credit bureaus contain personal information, account history information, legal information, and information about inquiries. Some lending institutions use more than one type of credit report because they are required to as a measure of meeting lending requirements. Others use multiple sources to ensure that they are getting a more comprehensive background on a consumer’s credit history. When a consumer completes a credit application, many creditors submit the personal information that is on the credit application to credit bureaus. This is how the credit bureaus compile personal information such as a consumer’s name, employment information, address, social security number, marital status, and telephone number. By using a credit report, the creditors will be able to cross-reference the information that the consumer provides on their application with the information that the credit bureau accumulated through other credit applications. Many credit institutions hire companies that research and verify that the information on a consumer’s credit application is accurate.

If you have an account with a creditor that reports to a credit bureau, your credit report will reflect a payment and account history. The information that a credit bureau reports regarding a consumer’s history on a credit account is referred to as a “tradeline.” On your credit report, there should be a “tradeline” for every creditor that reports account information to the credit bureau that is providing the report. Following is a summary of the information that is normally included in a “tradeline” on a consumers credit report:

  • Name of the creditor
  • Account number (usually incomplete of coded for security purposes)
  • Type of account (installment loan or revolving)
  • Balance owed
  • Summarized payment history
  • Date the account was opened
  • Credit limit
  • Co-signers on the account
  • Date information was last reported to the bureau

In addition to the information that is normally reported, a “tradeline” may indicate the following:

  • If the account has been included in a bankruptcy proceeding
  • If there has been a repossession of collateral
  • If an account has been charged off
  • If an account has been turned over to collections

Not all credit institutions report to credit bureaus, but most of them do. Most credit bureaus report payment history in 30-day payment intervals because 30-day periods are reflective of monthly billing cycles and payment installments. Policies vary amongst creditors with regard to the threshold at which they report delinquency to the credit bureau. Some creditors do not report delinquency until the consumer’s account reaches 60 days past due, while others report delinquency at 30 days past due. Some creditors do not report any account history to the credit bureau unless there is delinquency on the account. The “historical method” of reporting delinquency on your credit report will reflect the number of times that you fell more than 30, 60, 90, and 120 days behind on your payment obligations. Other credit reports utilize a rating system that assigns a “status” for each 30-day range of delinquency. This method is referred to as the “simple method of payment.” An R-1 rating indicates an account that was current or paid “as agreed.” An R-2 indicates that a consumer paid 30 days or more after the due date but less than 60 days after the due date. An R-3 indicates that the bill was paid 60 or more days after the due date but less than 90 days past due. An R-4 indicates that the consumer paid 90 or more days past due but less than 120 days. R-5 indicates that a consumer paid 120 or more days past their due date. R-7 usually means that a creditor repossessed collateral on the account and R-8 reflects that the account was turned over to collections. R-9 can be used to reflect many different statuses on an account. It may be used to reflect that a debt was discharged in bankruptcy, repossessed, foreclosed upon, or in collections.

Credit reports often include a section that provides information that is considered public record such as tax liens, judgements, and arrests and convictions. Credit reports also give records of inquiries. Inquiries are records that reflect requests made by creditors to a credit bureau for a consumers credit report. Inquiries indicate the name of the creditor that requested the report and the date on which the report was requested.

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Following are factors that are of particular interest to lenders:

Does the applicant have a stable job? How many years have they been at their place of employment? Do they have a responsible job title? Does the applicant have a stable style of living? Have they been at their place of residence for five years or more? Do they own or rent their home? Does the applicant exhibit stability with their finances? Do they have a checking and savings account? Do they have many recent inquiries? Does the applicant have a good payment history on existing and previous lines of credit? Do they have a past credit history free of judgements, bankruptcies, charged off accounts, or other signs of financial mismanagement? Does the applicant have a favorable debt to income ratio? (Debt to income ratio is a comparison of your outstanding indebtedness the income that you have to support debt repayment) Does it appear as though they are overextended on credit?

Credit Scoring

Creditors often rely on credit scores to help them determine the risk of lending to consumers. The information on a consumers credit file may be used to compile a score that will be used to determine if a consumer is granted a loan or line of credit. If a decision is made to grant a line of credit to a consumer, the credit score may be used to determine the interest rate that will be applied to the loan or line of credit. Generally speaking, the riskier it is to lend to a consumer, the lower the chances are that the consumer will be approved for the line of credit and the higher the interest rate at which the consumer will be required to repay the debt at if they are approved. Many lenders have “in house” scoring systems but they also rely on scoring models that are provided by credit reporting bureaus. Different credit bureaus use different credit scoring models, but the standards of determining a consumers credit worthiness are consistent from model to model and they are based on the Fair Isaac Company’s scoring criteria. The scoring system that is used may be termed a “Beacon,” “Empirica,” or a “FICO” score depending on what credit bureau is supplying the score. Some lenders rely upon “merged” credit reports that provide a compilation of consumer account and credit scoring information from more than one reporting bureau.

Understanding credit and improving credit worthiness

Weighing the Effects of Credit Information

The impact that credit rating factors can have on evaluation of credit worthiness is relative to the time frame during which they are reported and the relative “maturity” of the consumer’s credit history. If derogatory information has been reported to a credit bureau in the recent past, it will most likely weigh heavier against a consumer’s credit worthiness than information that was reported a relatively longer time ago. Generally speaking, creditors are more concerned about information in the near past because it is more indicative of the consumer’s present financial circumstances. That is not to say, however, that older derogatory information may not effect the outcome of a loan application or the interest or payment terms that are offered on a loan or credit card.

If derogatory information is reported on a consumer who has a “mature,” long standing, and otherwise positive credit history, the information will not affect the consumer’s credit worthiness or score as much as it would an individual who has a relatively “immature,” short, and less comprehensive history. A “mature” history is not only determined by length or account history, it is also determined by the kind of credit that the consumer uses. In other words, positive or negative information concerning a major credit card account (Visa, Mastercard, Discover, or American Express) or installment loan may weigh heavier than information that is reported on a merchant, department store or gas card. Finance company accounts may weigh heavier against a credit score, especially if they were established in the recent past. Finance company loans are regarded as riskier loans that consumers turn to when they run out of conventional options. They are relatively easy to acquire and often require payment of very high interest that drives monthly payments higher. The higher payments can contribute to financial mismanagement and over-extension on credit obligations.

Improving Your Credit Score

Order and reviewing your credit report

You will never know what is on your credit report unless you check it or get denied for a credit line. Order a copy of your credit report and review it to make sure that all of your personal information and account history information is complete and correct. In accordance with the Fair Credit Reporting Act, if you are turned down for credit, you may obtain a free credit report, provided you request it within 60 days. Credit reporting agencies are required to provide trained employees to help consumers interpret information that is found on their report. If you would like to order a credit report that merges credit information from the three major reporting bureaus, or if you desire additional credit monitoring and credit inaccuracies, visit www.monitrust.com.

Sometimes account histories for other individuals are mistakenly included in your report, especially if you have a common last name. If you are a “Jr” and your father has the same name, sometimes you can mistakenly inherit his credit history. Mistaken identity can work for you or against you, depending on the individual whose credit you mistakenly inherit, so dispute any derogatory information that is not yours. If there is derogatory information on your credit report that belongs to your spouse or you are divorced, you can request to have a credit report that is in your name only. This will only work if you were not listed as a co-applicant on the account. Otherwise, derogatory information may carry-over to your individual credit report.

Bring your accounts current

If you are delinquent on your accounts, you should bring them up to date as soon as possible. Delinquency weighs heavily against your credit score because creditors believe that past history is reflective of future expectancy. Contact your creditors and make arrangements to make up the arrears on your obligations. Some creditors have “in house” programs through which they will bring you current after making a specified amount of consistent payments, regardless of whether you make up the arrears (known as reaging).

Voluntarily close your accounts

When you voluntarily close an account, the creditor is responsible for reporting it to the credit bureau and it should be documented on your credit report as “closed by consumer.” The fact that you took the initiative in closing the account is an indication that you understand how to maintain reasonable use of credit and you are in control of your spending. After notifying a creditor that you want to close your account, you should always ask a creditor to provide a letter confirming that the account was reported to the credit bureau as “closed by consumer.” By doing so, you can easily have it corrected if you later find that it is reported incorrectly on your credit report.

To optimize their credit score, consumers must maintain open accounts, but the number of accounts should be limited. Credit scoring models rate against “Too many bank revolving accounts” and “Too few bank revolving accounts.” Establishing a consistent timely payment history on one or two major credit cards and limited merchant cards (department store cards and gas cards) will help to build a sufficient credit history. It is wise to close as many merchant cards as possible, especially on accounts that you opened solely for the purpose of making large “one time” purchases. For example, if you opened a credit line with an electronics store to purchase a computer, you should voluntarily close the account when the balance on the computer has been paid off, especially if you have no need for any other merchandise from that store. Otherwise, the account would remain open, which indicates that there is a potential that you will charge more debt. Generally speaking, large amounts of available credit can weigh against your credit score. The higher the cumulative total of available credit, the riskier it is to lend to the consumer. If a consumer has easy access to large amounts of available credit, one spending spree can cause them to go from financial stability to financial trouble.

Another reason why you should consider closing unnecessary charge accounts is because revolving debt weighs heavier against your credit score than installment loan debt. Installment loan debt is debt that credit grantors underwrite (review for approval) each time a consumer requests an extension of credit. It is considered to be more regulated and consumers are less likely to get into a difficult financial situation because if they are risky to lend to, the loan will be denied. However, revolving debt is relatively easy to acquire by the consumer and if a consumer has high available balances on revolving debt, regulating use of their credit is at their own discretion, not the lenders. High credit limits on revolving debt may indicate a consumer’s inability to control their spending behaviors. Successfully managing revolving debt is necessary to build credit but too much revolving debt may negatively affect your credit worthiness.

Pay down loan and credit card balances

If your balances are high relative to the loaned amount or credit limit, it may weigh against your credit score. High balances in comparison to your credit limit may be considered a sign that you are overextending yourself and dependent on credit to maintain, or artificially enhance, your style of living. It can be regarded as an indication that you are not in control of your spending habits because you consume up to the maximum that your credit will allow. If you pay your credit cards off on a monthly basis or carry reasonable balances and establish a consistent payment history on credit cards, it may assist you in building credit. However, carrying high balances and exhausting available credit limits may be considered unreasonable use of credit and may weigh against your credit score. Having too many accounts with balances on them may also weigh against your score.

Limit the number of new accounts and inquiries

An excessive number of new accounts (accounts opened within the last year) or inquiries may indicate that a consumer is desperate for credit, which may be reflective of a credit problem. Too many new accounts can weigh against your credit score. Numerous inquiries may be considered a threat to a lender because they may indicate that a consumer is attempting to acquire multiple lines of credit at the same time, which could lead to the consumer being overextended and at risk of defaulting on their obligations. In accordance with the Fair Credit Reporting Act, inquiries can remain on a consumer’s credit for a maximum of two years . Numerous inquiries may be reflective of a consumer who is subject to excessive impulse buying desires or a consumer that is dependent on additional credit to get out of a financial crisis.

Credit scoring is based, partially, on the maturity of the credit lines that are on a consumer’s report. Accounts that have been established for years with a good payment history and reasonable use of available credit can stabilize and improve a credit score. However, accounts that are less than a year old, do not have a mature history and may weigh against the score because the consumer’s ability to maintain long term stability with their increased spending power has not been established. Derogatory information that is reported on a consumer that has a mature history may not weigh against the credit score as much as derogatory information that is reported on a consumer who’s credit history is not mature.

Pay off accounts that are public records, “charge-offs” and collection accounts.

Make arrangements to pay on accounts that have been charged off accounts or placed in collections. Negotiating a settlement (see negotiating a settlement) on collection accounts may be a very effective way of paying balances off at reduced amounts. If you have collection accounts, judgments, or tax liens, you should pay them off as soon as you can, depending on how close you are to having the accounts drop off of your credit report (see guidelines concerning information as reported on your credit report.) Balances on tax liens and judgements are recorded as public record and have been deemed by the courts as legally owed by the debtor. Unsatisfied public records are considered good indicators that a debtor is not financially responsible and will weigh heavily against their credit score. Be sure that no information exceeds the reporting time-frame limitations as set forth by the Fair Credit Reporting Act.


For the protection of the consumer, consumer reports are required to meet other guidelines. If the source that provides information regarding a bankruptcy indicates what chapter was filed, the reporting agency must include the chapter on the credit report. Additionally, if a bankruptcy is withdrawn before “final judgment” and the agency has received information confirming that it was withdrawn, the agency must indicate it on the consumer report.

Accounts that are voluntarily closed by the consumer

When including information that is relative to a consumers account on a report, if an agency receives verification that the consumer voluntarily closed the account, they are responsible for indicating on the report, that the consumer voluntarily closed the account.


An agency is responsible for noting that there is a dispute over information that is reported on a consumer report if the consumer directly notifies the agency. It is the agency’s responsibility to investigate and record the status of the disputed information or delete the information from the consumer report. There is a 30-day time frame that begins on the day the agency receives the formal notice of dispute from the consumer, during which the investigation must be completed. If, during the course of the investigation, the agency receives additional “relevant” information pertaining to the dispute, they are responsible for extending the investigation period for an additional 15 days. The agency does not have to provide a 15 day extension if, during the initial 30 day period, it determines that the information that a consumer has supplied to support their dispute is “inaccurate,” “incomplete,” or unverifiable.

If, after investigating the dispute, the agency determines that the furnisher of the disputed information (creditor) provided “inaccurate or incomplete,” information, the agency must correct the information as it is reported on the file, or delete the incorrect information. If information is deleted as a result of a dispute investigation and it is in excess of three days since receiving notice of dispute from a client, the agency must mail written notice to the consumer of the results of the investigation within 5 business days. The written notice has to include a statement that the investigation is complete and a copy of the consumer report that reflects any changes that resulted from the dispute investigation. It must also include a notice advising that the consumer has the right to add a statement to their file that disputes the “accuracy and completeness of the information”(see consumer statement.) The agency must provide a confirmation of the consumer’s right to have the agency provide notification to any person who previously had received a copy of the incorrect report within 5 business days. Specifically, the agency must submit a copy of the corrected report to any person who received the report within two years prior for employment purposes, and to any person who received the incorrect report “for any other purpose” within six months prior to the correction. If the consumer requests, the bureau is responsible for including a description of the procedure that was used to determine the accuracy and completeness of the information within 15 days after receiving the request. If an agency deletes information as the result of the dispute within three business days or less from the day that the agency received a notice of dispute from a client, they may notify the consumer by telephone of the deletion.

The agency is responsible for reviewing all the “relevant information” that a consumer provides but they can end the investigation if the consumer does not provide enough information to support their investigation. The agency may also terminate the investigation if they “reasonably determine” that the dispute is “frivolous” or “irrelevant” and they must notify the consumer within 5 days. The notification must include the reason for terminating the investigation and it must identify information that is required to investigate the dispute. When an agency provides notification of the results of an investigation to a consumer, they must include a notice that the consumer has the right to request that the agency submit notification to other agencies through an automated system that enables them to share information with other bureaus.

Information that has previously been deleted from a report file may only be re-added if the creditor who is reporting the information “certifies” that the information to be re-added is “complete and accurate.” Within 5 days of the reinsertion of information, the agency must notify the consumer in writing. The agency is responsible for providing information identifying the party that provided the information that lead to the reinsertion of information on a report. The agency must also provide the address and contact information for the party who provided the information, and they must provide notification to the consumer that the consumer has the right “to add a statement disputing the accuracy and completeness of the disputed information.” Consumer reporting agencies are responsible for taking “reasonable procedures to prevent the reappearance of information” that has previously been deleted. Agencies that maintain files on a nationwide basis must have an automated system that allows parties who provided the information to the agency (creditor) to be able to report “incomplete or inaccurate information,” as determined by the investigation to other reporting agencies.

Your rite to include a consumer statement

If you disputed information that appears on your credit report and the credit bureau determines that you have not provided enough information to warrant changing the report or deleting the information, you are entitled to prepare a statement to be added to your credit report. The statement must be limited to 100 words. Preparing a statement will give you an opportunity to fully explain the reason why you are disputing the information despite the fact that you were unable to provide enough supporting evidence to have the information changed or removed.

Guidelines governing how creditors report information to the credit bureau(s)

They cannot report information that they know is incorrect. They cannot ignore information that contradicts information that they have on file. They must notify the credit bureau if a debtor disputes information with them. They must indicate when a consumer voluntarily closes an account. They must investigate a consumer dispute within 30 days of receiving notice.

The Fair Credit Reporting Act

Unfortunately, credit problems are not only limited to our immediate ability to manage our finances and make payments on time. If you were past due on credit obligations and brought your account(s) back to a current status, the damage that was done while you were behind may follow you for a while. Being current on credit obligations bodes well for you in that it demonstrates your ability to afford to meet immediate obligations, but the creditors are also interested in your “past track record” because they fear that there may be a correlation between past history and future expectancy. To remove derogatory information from your credit, your credit often has to stand the test of time. You can improve your credit by bringing your accounts current and remaining current on your obligations. Staying current on your obligations demonstrates that your finances are more stable and that you can effectively manage your finances and your debt. To understand the rules that govern how long information can stay on your credit report you need to understand the Fair Credit Reporting Act.

The Fair Credit Reporting Act created rules that govern reporting of information as it appears on credit reports. Initially, the parameters of reporting guidelines in the Fair Debt Collection Practices Act were vague. Most information could remain on a consumer’s credit report for approximately 7 years (Bankruptcy could be reported for up to 10 years) but the limits of when the seven-year period began and ended were not clearly defined. In 1996 the Consumer Credit Reporting Reform Act was created to clarify the credit reporting guidelines that are set forth in the Fair Credit Reporting Act.

In accordance with the Fair Credit Reporting Act, the following information that was reported to a credit bureau on or after January 1, 1998 is not permitted to appear on a consumer’s credit report. Information that was reported to a credit bureau earlier than January 1, 1998 may not be subject to the same requirements.

Bankruptcies that date back more than 10 years from the date of entry of the order of relief from or the date of adjudication. Civil suits, civil judgements, or records of arrest that date back more than 7 years from the date of entry or that exceed the statute of limitations. Paid liens that date back more than seven years from the date of the report. Accounts that were placed for collection or charged off which date back more than seven years beginning 180 days after the last payment was due prior to the account being turned over to collections or charged off. Any other derogatory information other than records of conviction for crimes that date back more than 7 years from the date of the report. The above referenced guidelines are not applicable for any consumer report to be used in connection with any of the following: A credit transaction involving or expected to involve a principal amount of $150,000 or more. Underwriting life insurance, which may be expected to include a value of $150,000 or more. Pre-screening for employment of any individual at a salary of $75,000 or more.