You probably know that somewhere filed away on giant servers are your credit reports – from the three credit reporting bureaus – Experian, Equifax and TransUnion. You may even know that they probably have different information. The reason for this is that there is no federal law dictating that lenders must furnish information to all three bureaus or for that matter that they have to report information to any of them. But did you know that your reports might contain serious errors?
A shocking 20%
In February of last year, the Federal Trade Commission released a study that was very eye opening. It had found that 20% of us have errors in at least one of our three credit reports. Even worse, about 5% of us have mistakes in our credit reports so serious they could be causing us to pay more for products such as insurance and auto loans.
The best reason to check your reports regularly
What this suggests is that it’s important that you check your credit reports regularly. You can get them free once a year from each of the three credit reporting bureaus or on the website www.annualcreditreport.com. Most experts say it’s best to get your credit reports one at a time every three months. This is sort of a free way to monitor your credit year-round. If you don’t do this you’re probably putting your wallet at risk.
Not just your responsibility alone
The Federal Trade Commission has said that the accuracy of your credit reports is not your responsibility alone. The companies that supply financial data to the three credit reporting companies and that are sometimes referred to as “furnishers” are also part of the equation. The information they provide should be both thorough and accurate. One of their responsibilities is to investigate any complaint consumers make regarding potential errors on their credit reports.
Slapped by the CFPB
The recently created Consumer Financial Protection Bureau (CFPB) is not very happy with the way the furnishers and credit agencies have been handling complaints filed by consumers. The biggest complaint is that there is no official way for the credit reporting agencies to send information to the furnishers that was provided by consumers who had filed complaints. So the CFPB wants the credit reporting companies to begin forwarding the data given to them by consumers through E-Oscar, an electronic document-sharing program that is already in use. Thanks to the CFPB the system has been upgraded so that Experian. Equifax and TransUnion can now send the documents that were provided by consumers to the furnishers when they dispute an item or items on their credit reports. In fact, the CFPB has actually formalized the responsibilities and legal role of the information furniture’s when it comes to consumer complaints about their credit reports.
Investigating disputes – whenever a consumer files a dispute about an item on his or her credit report, the furnisher needs to be able to obtain information about it and must investigate the consumer’s complaint
Providing results – the CFPB has said that in addition the information furnishers must report the results of their investigations to the consumer reporting bureaus that originally filed the dispute.
Inaccuracies – finally, the information furnisher must report the results of their investigations to the credit reporting. They must also modify, permanently block or delete disputed information that is found to be inaccurate, incomplete or that cannot be verified.
The heat is on
What this amounts to is that the CFPB has put the heat on furnisher’s to increase their ability to investigate disputes from consumers, and on credit reporting firms to make sure that the furnishers get the information from consumers regarding disputes with the credit reporting agencies. And if the information furnishers don’t conform, the CFPB says it will take “supervisory and enforcement actions” against them. It’s believed that this will get the attention of the furnishers and credit reporting bureaus to do better on credit report disputes or see the wrath of the CFPB.
What to look for
When you get your free credit reports it’s important to look for the following negative items:
- Charge-offs
- Late payments
- Accounts going to collection (collection accounts)
- Tax liens
- Bankruptcies and foreclosures
- Judgments and lawsuits
If you find one or more of these on a credit reports and you believe the information is in error, it’s important to dispute it. The three credit reporting agencies have forms on their websites you can use to file a dispute. However, most experts say it’s best to file your dispute in the form of a letter along with the documentation you have to support your claim. While the credit reporting agencies are required to contact the company that furnished the information and ask that it be verified this has been a very haphazard process – which is, of course, why the CFPB has put the heat on both the furnishers and credit reporting agencies to do a better job of handling disputes.
Your credit score
You should also know your credit score. It’s critical because most lenders look only at it when deciding whether or not to grant you credit. Your credit score is a three-digit number that is a sort of distillation of your credit reports. It’s created using a formula or algorithm that was created by the Fair Isaacs Corporation or what is now known simply as FICO. You can get your credit score on its website, www.myfico.com or from one of the three credit reporting bureaus or from an independent information provider such as CreditKarma.com or CreditSesame.com. If you choose to get your score from FICO you’ll either have to sign up for a free trial subscription of his Score Watch service or pay $19.95. While you can get your credit score free from one of the credit reporting agencies, be careful and don’t sign up for a service that you will have to remember to cancel. We think CreditKarma.com or CreditSesame.com might be your best options as you could get your score free from either one of them without having to sign up for anything. These two websites provide other helpful information such as the amount of money you owe on each of your credit cards, the amount of your mortgage and auto loan (if applicable) and tips for managing your debts. Finally, if you have a Discover Card you’re in for a nice surprise. Check out your next statement and it should include your FICO credit score. How cool is that?
Understanding your credit score
As you might guess, the higher your credit scores the better. Your FICO score will be somewhere between 300 and 850. There is also a score that was developed by the three credit bureaus called the AdvantageScore. It’s a bit different in that it ranges from 501 to 960. To make matters even more complicated, each scoring model uses a different algorithm and weighs your credit report differently so you might have a score of 750 from Credit Karma and a 762 from Credit Sesame.
The components of your credit score
While there are more than 100 different credit scoring models used in the industry, there is one thing that seems to be universal and that is the five components that make up a credit score. They are.
- Your credit history
- Your utilization of credit
- How long you’ve had credit
- Types of credit you’ve used
- Recent searches for credit
Of these five components the first two – credit history and credit utilization – account for 65% of your credit score. Your credit history is just that or how well you have used credit in the past. Credit utilization is a bit trickier as it’s really your debt-to-credit ratio or how much credit you’ve used versus the total amount of credit you have available. For example, if you have $5000 in total credit limits and had charged up $2500 you would have a debt-to-credit ratio of 50%, which would be too high.
Unlike your credit history, credit utilization is something you have control over. You could improve it and get a better score. All you would have to do is pay down some of your debt and presto! Your credit score should increase.