Credit Reports Explained - How Credit Works - Credit Secrets

Credit Report Explanation

The American credit reporting system is the envy of the world. Credit reports and credit scoring have been responsible for creating timely access to consumer credit at less expense to consumers. The federal Trade Commission has called the timely access to credit "a miracle (that) is only possible because of our credit reporting system." This is accomplished within the framework of a law, the Federal Fair Credit Reporting Act, that provides consumers with disclosure about their legal rights, options for redress and liability provisions. Independent studies have confirmed the fairness and effectiveness of the credit reporting and scoring system in helping consumers qualify for loans. Above all, the law ensures privacy of individual consumer data by limiting the uses of the information.

Facts about the U.S. credit economy

There are over one billion credit reports issued annually
Two-thirds of the American economy is driven by consumer spending
Outstanding consumer credit totals $1.7 trillion
Credit reporting saves the average person 200 basis points on their mortgage loan
On average, every U.S. household owns a car and one-third have a second car
The average American has eight credit cards or loans
There are 7000 credit card issuers in the U.S. offering more than 27,000 types of payment options

What is a Credit Report?

A credit report is a central source for creditors to report the paying habits of their consumers in a combined effort to simplify the qualification process. They rely on the information in the report to decide the risk factor of the applicant. Risk factor meaning how likely is this consumer going to pay their debt to us. If you have negative payment history, it may be an indication that you will default on your account with them. The higher the risk factor the more the creditor is going to increase the rate of interest on the account or deny the application all together.

What Information is Included?

Personal information. Compiled from credit applications you've filled out, this information normally includes your name, current and recent addresses, Social Security Number, date of birth, and current and previous employers.
Credit history. The bulk of your credit report consists of details about credit accounts that were opened in your name or that list you as an authorized user (such as a spouse's credit card). Account details, which are supplied by creditors with which you have an account, include the date the account was opened, the credit limit or amount of the loan, the payment terms, the balance, and a history that shows whether or not you've paid the account on time. Closed or inactive accounts, depending on the manner in which they were paid, stay on your report for 7 to 10 years from the date of their last activity.
Inquiries. Credit reporting agencies record an inquiry whenever your credit report is shown to another party, such as a lender, service provider, landlord, or insurer. Inquiries remain on your credit report for up to two years.
Public records. Matters of public record obtained from government sources such as courts of law -- including liens, bankruptcies, and overdue child support -- may appear on your credit report. Most public record information stays on your credit report for 7 years. Bankruptcies may remain on the report for up to 10 years. Unpaid tax liens may remain for up to 15 years.

What is Not Included?

A credit report does not include information about your checking or savings accounts, bankruptcies that are more than 10 years old, charged-off or debts placed for collection that are more than seven years old, gender, ethnicity, religion, political affiliation, medical history, or criminal records. Your credit score is generated by information on your credit report, but is not part of the report itself.

Who Can Look at Your Credit Report?

Anyone with what is considered a permissible purpose can look at your report. These companies, groups, and individuals include:

Potential lenders
Landlords
Insurance companies
Employers and potential employers (usually only with your written consent)
Companies you allow to monitor your account for signs of identity theft
Some groups considering your application for a government license or benefit
A state or local child support enforcement agency
Any government agency (although they may be allowed to view only certain portions)
Someone who uses your credit report to provide a product or service you have requested
Someone that has your written authorization to obtain your credit report