An Overview of the Credit Reporting Industry

This section provides a synopsis of the credit reporting industry to give you a better understanding of the environment that you’re operating within when implementing credit restoration. For a more comprehensive description of the credit reporting industry, visit the “Credit Reporting & Scoring” section of our Credit Library .

A BRIEF HISTORY OF CREDIT REPORTING… Credit reporting was born more than 100 years ago, when small retail merchants banded together to trade financial information about their customers. The merchant associations then turned into small credit bureaus, which later consolidated into larger ones with the advent of computerization.

By the 1960s, controversy surfaced over the credit reporting agencies (CRAs) as credit reports were being used to deny services and opportunities, and individuals had no right to see what was in their files. In addition, CRAs back then reported only negative financial information as well as "lifestyle" information culled from newspapers and other sources -- information such as sexual orientation, drinking habits, and cleanliness.

The controversy led to a congressional inquiry, and in 1970, Congress passed the Fair Credit Reporting Act (FCRA), which established a framework for fair information practices to protect privacy and promote accuracy in credit reporting. Consumers gained the right to view, dispute and correct their records, and CRAs began to supplement reports with information on consumers' positive financial history. Visit “The History of Credit Reporting” in our Credit Library to learn more about the origins and evolution of the credit reporting industry.

THE BIG THREE… Equifax, Experian and TransUnion are the 3 major CRAs (often called “credit bureaus”) that collect information about consumers including your payment history, collections, judgments, tax liens, foreclosures, bankruptcies and credit inquiries.

Of significance is the fact that the CRAs are profit-making entities. People often assume they are non-profit entities, or some government agency. Quite the opposite, they make a lot of profit by collecting financial information about us from creditors and selling this information to lenders, insurance companies and employers in the form of a credit report. Simply put, they are in the information gathering and selling business.

Another key point to remember is that the CRAs don’t share information among themselves. For example; it is common to see items reported on a TransUnion credit report and not on Equifax. It just depends on which CRAs a creditor reports information to. There is no legal requirement for creditors to report anything. Some creditors report to just one of the CRAs, while others report to all three. It’s up to them.

ERRORS, ERRORS, AND MORE ERRORS… When you consider the massive quantity of data that the CRAs are accumulating and spitting back out in the form of credit reports, it’s a daunting task to manage it accurately.

People think that the CRAs are on top of all this data, able to keep it accurate and up-to-date. Remember, there are credit records on literally 100s of millions of American consumers, both past and present; possibly as many as a billion when you consider they’ve been collecting data in a computerized format since the 1970s. And for each person’s credit file, there are dozens of accounts reported spanning over the past 7 years at least. Not only that, but the data on the current accounts changes every month as creditors report last month’s information to the CRAs. Zoiks! Is it any wonder there are numerous errors in credit reports.

The CRAs have no requirement upon them to verify or maintain up-to-date information in your credit profile unless a creditor provides new information, or if you dispute it. So, as time passes, unless creditors supply the latest accurate information about the accounts in your report, it is highly likely that there will be outdated and inaccurate information in your credit report.

A national survey conducted in 2004 by the U.S. Public Interest Research Group found that, 25% of credit reports have serious errors that cause consumers to be denied credit. “Serious” errors included false delinquencies, public records that belonged to a stranger, or credit accounts that did not belong to the consumer. In addition to incorrect reporting the study found that 20% of credit reports were missing credit cards, loans, mortgages, or other accounts that are critical to demonstrating consumer credit worthiness.

 

Credit Scores...Your credit score is a number calculated by applying a sophisticated mathematical model using “algorithms” to the credit behavior seen in your credit report. It's a way to objectively gauge how much of a credit risk you represent to a credit grantor and the likelihood that you will repay your debts.

The company that develops and licenses the use of the risk scoring models that calculate your score is Fair Isaac Corporation (FICO). FICO, formed in 1956, is an independent company with no affiliation with any CRA. The CRAs and numerous “resellers” (there are literally 100s of them - See “Resellers of Credit Reports” in our Credit Library) contract with FICO and pay a royalty fee to use their risk models to calculate a score when credit is pulled. Lenders use FICO scores to determine interest rates and credit limits. For more on FICO, visit "Who is FICO?" in our Credit Library.

FICO credit scores range from 300 to 850, with the low end of the scale indicating a poor credit risk. Your scores will vary depending on the type of creditor pulling your credit. This is because there are different variations of risk models that are designed for different types of credit. For example, mortgage credit scoring is different from automobile or insurance scoring. Credit scores purchased online from the CRAs will also differ from scores obtained by creditors because they use their own proprietary formulas - not FICO’s.

For a complete discussion about credit scoring, visit “How Credit Scoring Works” in our Credit Library.

 

HOW LONG ITEMS ARE REPORTED…Most items remain on your credit report for seven years from the “date of last activity”. Bankruptcies are reported for as long as ten years and unpaid tax liens are reported indefinitely. For a complete breakdown of how long specific items are reported for, visit “How Long Are Items Reported” in our Credit Library.

The date of last activity is generally the last date of any transaction for each account. This date is reported for each account on your credit report. The date of last activity can be the last time you charged an item on your credit card, the last payment you made on an installment loan or when you paid off an account. It can also state when an account went into collection or the date it was charged-off.

Preparing for the Dispute Process

The first step to the dispute process starts with gathering your documentation; namely, copies of your identification and credit reports.

 

3 FORMS OF IDENTIFICATION… The CRAs usually require 3 forms of identification to accompany any dispute as this helps authenticate your identity. Their purpose in requiring IDs is two-fold; first, to correctly match your name, social security number and current address to your existing file on record and second, to substantiate that the dispute is made by the consumer.

The forms of identification that the CRAs require are:

• Driver’s License or State ID - to validate your name.  (Not copies of a birth certificate or passport)
• Social Security Card, W-2 or 1099 - to validate your tax identification number.  (Not a tax return or paystub)
• Billing or Bank Statement - to verify current address.  (Not a collection notice or statement showing an overdue balance - for obvious reasons)

Make sure that the copies of your driver’s license and Social Security card are clearly readable. There are watermark images in the background of these documents that often “muddy” the photocopy, thereby making it hard to read the numbers on them.  It’s a good idea to enlarge the photo by about 130%, and increase the brightness and increase the contrast. 

If a dispute is sent to the CRAs without copies of identification, often it will result in a response requesting the above forms of ID; thereby causing a delay in the process.

 

OBTAIN YOUR 3 CREDIT REPORTS… To check your report for questionable items you'll want to either obtain your credit report via phone or online access. Credit reports are notorious for errors, so even if you are sure that you have made your payments on time for a while, you should definitely pull a new report.

It’s important that you obtain a copy of your credit report from all three CRAs, because not all accounts are reported to all three CRAs.   Creditors are not required to report to the CRAs and often report to only one or two of them.  So, you may find derogatory accounts listed with one bureau and not with another.  This is very common with collections.

How to Obtain Your Free Credit Report.  This section of our Credit Library explains how you can obtain free copies of your credit report for various reasons, including if you’ve been denied credit within the last 60 days, are unemployed, or are a victim of identity theft. 

You can also obtain a free credit report from each of the three CRAs once a year at www.annualcreditreport.com.  This was one of the changes in the FCRA that FACTA amended to a) give people the opportunity to check their credit report for errors prior to applying for financing, and b) to review their credit so as to better protect themselves from identity theft.

 

ORGANIZE YOUR PAPERWORK… It’s important that you keep good records of any disputes made, all correspondence received, and the results obtained.  This applies to actions regarding the CRAs, collection agencies and creditors.

• CRA Correspondence - Set up separate folders for TransUnion, Equifax and Experian.  Keep a copy of the correspondence received from them chronologically.  Keep the most recent information forward in the folder.
• Creditor & Collection Agency Correspondence - Set up separate folders for each creditor and collection agency that disputes are made with.  These disputes will most likely be made after disputes are made with the CRAs.  Be prepared to have some extra folders for these.

Reviewing Your Credit Reports

Upon obtaining your credit reports, you will want to review them to identify any negative items.  If you are unfamiliar with reading credit reports, you can visit “How to Read Credit Reports” in our Credit Library.  Mark each item that has negative information reported about it, even if it is from years ago. 

 

TYPES OF NEGATIVE ACCOUNTS… Below is an explanation of the types of negative accounts and what to look for on your credit report.

• Late Payments - When you make a monthly payment on an account that is more than 30 days late, it is reported as such to the CRAs.  If you are late on making your payment, but not yet 30 days late, then you are reported as making your payment on time.  The longer you are late on making your payment (i.e. 60 or 90 days), the worse impact it has on your score.  Also, the more times you are 30 or more days late, the worse impact on your score.

While you may have late payments reported on your credit report and are now current with your account, the past late payments still hurt your score.  Even if the late payments are from years ago, they still count against you.

• Collections - Numerous reporting errors occur for collections on credit reports.  There are several reasons why this is so; a) medical insurance pays late and an account gets sent to collection before the account is paid, b) a collection gets paid but isn’t updated to reflect a zero balance, c) collection agencies either negligently or purposely report balances in error or duplicate reporting of the account to coerce payment.  You can read more about “The Collection Process” in our Credit Library.

Many people think that when a collection is paid, it is removed from the credit report, or that it no longer hurts the score.  This is not the case.  Even though it is paid, it continues to report and hurt your credit score.  Granted, it doesn’t have as great of a negative impact as an unpaid collection. 

Another frustration for consumers is to find collections reported on their credit report at the most inopportune time.  For example, when trying to obtain financing, a credit report is pulled and they had no idea a collection account is being reported… common with the unpaid portion of medical bills going to collection.  It is very common that a collection letter was never sent to the consumer by the collection agency taking over the account.  This actually works to your advantage because you have the chance to deal a death blow to the account through Debt Validation. This process gets it removed from your credit report and eliminates any future collection attempts by the collection agency. To learn more about fighting collections, visit “What is Debt Validation?” in our Credit Library.

In most cases, the strategy of paying off your collections to increase your credit score yields limited results.  What’s needed is to remove them entirely.  Disputing with the CRAs and collection agencies can accomplish this.

• Charge Offs - Also reported as “profit & loss” or “written off”, charge offs are accounts that have gone into default and written off for tax purposes by the creditor.  There is little difference between a charge off and a collection, except that a collection is an account with a third party collection company, and a charge off is still held by the original creditor.

Typically you’ll see the late payment history reported showing 30, 60, 90 and 120 day late payments and then finally a default or charged off date.  Also, don’t be misled by the term “written off”.  Some people think that if the creditor wrote off the loss, they don’t need to pay the debt.  Not true.  The creditor is simply indicating that the account is considered in default, enabling them to write it off for tax purposes.

Like collection accounts, it helps little to pay these account balances off, unless they are recently reported.  Yes, it is better than being unpaid, but don’t expect your credit score to rocket to high levels just because you paid off old defaulted accounts.  For more information, visit “What is a Charge-Off?” in our Credit Library.

• Foreclosures & Repossessions - Foreclosures and repossessions are not always indicated as such on the credit report.  Sometimes it will say foreclosure, and often it will just show the late payment history for the mortgage.  Similarly, repossessions may just be reported as an installment loan that is charged off with a balance owing.

These are very damaging to your credit score because unlike a credit card, they were secured by an asset, which people are less likely to default on, thus carrying more weight on the score.  Losing a home or a car is of much greater consequence than just defaulting on a credit card or not paying a collection.  Likewise, the credit score bears this out. 

• Public Records - This section of the report includes civil judgments, tax liens, child support liens and bankruptcy filings.  Of special concern is whether the judgments and liens are reporting correct amounts and whether they are paid or not.  It is crucial that any judgments and liens be reviewed and any satisfactions recorded at the court house.  You should review “About Judgments & Tax Liens” in the Credit Restoration section of the library (this section) and “Judgments, Tax Liens & Child Support” in the Credit Library for more detailed information.

One key point to keep in mind is that judgments or liens are reported on your credit report without any notice to you that they are reported.  While most people are aware of any judgments obtained against them, since it is a court action, many people have discovered tax liens on their credit report when applying for financing and never even knew there was a lien, much less being on their credit report.  This is especially true with State tax liens.

The amount of impact that a judgment or tax lien has on the score is very similar to a collection, even though it has a more concrete basis of validity and collectability.

 

OTHER KEY REPORTING ELEMENTS TO REVIEW… In addition to negative information, you should be aware of the following factors that impact your credit rating. 

• Duplicates - Accounts listed twice by the same creditor, or the same account listed by two separate creditors - common with collections as they are sold from one collection agency to another. Another scenario of duplicates is when a judgment is obtained and reported as such, while the original account is still being reported.

A common mistake people make when reviewing a tri-merged report from a mortgage lender is to see the same item listed twice and think it’s a duplicate.  The vast majority of the time it is not a duplicate.  It’s just reported once with the information from one CRA, and again with the information from another CRA.  If you look to see what CRAs the item is reported on in the line item, you will see the distinction.

• Recentness of Reporting - Something you want to pay close attention to on your credit report is how recent an item has been reported, often labeled as “reported date” or “last reported”.  Accounts that you are making monthly payments on are typically reported each month.  Accounts that are closed are no longer reported.  Visit “The Recentness of Trade Line Activity” in our Credit Library for a complete description of how reporting dates affect credit scores.

One of the primary concerns has to do with collections and defaulted accounts that have unpaid balances.   If you have an unpaid collection that was last reported 2 years ago, this has less impact on dropping the score than a new collection from a month ago.  In fact, a recent collection that has been paid off, say 2 months ago, will have greater negative impact than an unpaid collection last reported 2 years ago.

It doesn’t make sense at first glance, but what the scoring equation takes into account is the fact that that collection from 2 years ago was just that… 2 years ago.  However, if you pay it off now… which you would naturally think would help to improve your score, the opposite will happen… your score will drop.  Why?  Because the “reported date” will now be very recent, having the same impact as a new collection, even though it is paid off. The good news is that after about 90 days, the score will rebound and most likely be higher than before because it is now paid.  For more information, visit “Paying Off Collections or Defaulted Accounts” in the Credit Library.

The bottom line - just be aware of the drop in score that will happen by paying off old collections.  Also, its best to pay off a collection rather than making monthly payments, because monthly payments will keep causing the reported date to be updated to the previous month and you still have an outstanding balance… as if it were a new collection. 

• Positive to Negative Item Ratio - Add up the number of accounts that are currently open and have no negative information reported about them (positive accounts), then add up the number of accounts, both open and closed, that have negative information reported about them (negative accounts).  Compare the quantity of each.  What’s your ratio?

If you have 2 open positive accounts and 30 negative accounts, your ratio would be 1 to 15.  Obviously, you want to increase the number of open positive accounts and decrease the number of negative accounts.  If you have 30 negative accounts, and through credit restoration you reduce this to 12 negative accounts; while at the same time increasing the number of open positive accounts to 4, your ratio would have improved to 1 to 3… a major improvement from 1 to 15!  You could expect your score to jump dramatically with results like this.

True, this is not a scientific approach to determine how much your credit score would increase, but it is a good barometer of making progress.  The actual nature of any negative items remaining, along with the types, amount of debt and length of history of any positive accounts will determine the degree of impact that any improvement in your positive to negative ratio will have.  Visit “Positive vs. Negative Items Ratio” in the Credit Library for more information.

• Open Trade Lines - These are accounts that are active.  Either you’re making payments on them or they are unused charge accounts or lines of credit.  The key here is, the more the better.  In fact, many mortgage programs require a minimum of 2 or 3 trade lines with at least one year of payment history to be eligible for financing.  If you have few or no trade lines, visit “How to Establish New Trade Lines” in our Credit Library to learn how to get some new accounts started, even if you have bad credit.

Think of it this way, your credit score is, for the most part, a measurement of your ability to make payments on time during the past 24 months.  The more accounts that you have reporting payments being made on time, and having various types of accounts (mortgage, installment & revolving), the better you are able to demonstrate that you are a good credit risk.  Hence, the higher your score.

To achieve scores above 720, generally you need to have at least three trade lines with more than a year of history.  The amount of payment doesn’t matter nearly as much as the number of trade lines and length of payment history.  You are better off to have three trade lines with $50/month payments than one trade line of $150/month. The number of open trade lines in good standing has about a 35% weight on score.  From this you can see that the more, the better… especially within the past two years.

While the length of payment history is a factor in the scoring equation, it is only about a 15% factor, with most of the weight being in the first 24 months.  After that, it doesn’t factor in that much… unless there are late payments.  Late payments will hurt you more than the payments you made on time prior to two years ago will help you.  It’s not fair, but it’s the way it is.

If you have a recent closed account with payment history within the last year, this helps keep a higher score.  However, as each month goes by, this payment history falls further back into time, having less and less impact on helping your score.  For more information about how credit scoring works, visit “How a Credit Score is Calculated”. So much for operating on a cash only basis… if you want a high credit score that is.

• Revolving Accounts - Except for negative items from you credit report, your “utilization ratio”  on revolving accounts has the most impact on your score.  Revolving accounts include credit cards, charge cards and lines of credit.  Your utilization ratio is simply the total amount of balances owed on these types of accounts compared to the total amount of credit limit.

If your credit card limits add up to $10,000 and the balances owed on these accounts equal $7,000, then your utilization ratio would equal 70%.  In other words, you are using 70% of your available credit limit.  Having a utilization ratio above 30% will hurt your credit score.

If your utilization ratio is over 80%, the impact on your score will be punishing.  It is not uncommon to see scores fall by more than 100 points due to high ratios such as this.  The good news is; just pay down your balances and your score will rebound once the new balance is reported.

One common mishap committed by many is to close charge cards they aren’t using.  This reduces your combined total of credit limit and will likely reduce your score.  It also has the impact of reducing the number of trade lines contributing to your payment history, thus producing a double whammy to hurt their score.

A common myth among people is that having high credit limits available to spend will cause your score to be lower.  The thinking is that by having lots of available credit is a risk to the creditor and therefore affects your score.  This makes sense, but is not how the scoring equation works.  In fact, the amount of credit available to you has no impact on your score… except in relation to the utilization ratio.

Bottom line… don’t close your credit card accounts, and keep the aggregate balance under 30% of the aggregate limit.  Visit “Managing Your Utilization Ratio” in the Credit Library for more information.

• Inquiries - For most people, credit inquiries have little impact on their credit score.  This may seem contrary to what we’ve been led to believe, causing many people to fear having their credit pulled because they are told that it will drop their score.

There is only one type of credit inquiry that counts toward your credit score… when you apply for credit. When you apply for a mortgage, auto loan or other new credit, you authorize the lender to request a copy of your credit report.  These types of inquiries are referred to as “hard inquiries”.  A mortgage inquiry typically impacts the score only 3 to 5 points.  In fact, most credit scores are not affected by multiple inquiries from auto or mortgage lenders within a short period of time. Typically, these are treated as a single inquiry because the risk model allows for you to “shop” for the best deal.

However, applying for several credit cards at once will be viewed as a higher risk, because it is possible to obtain several credit cards at once.  In this situation, the score may drop by 10 or 20 points.

Credit inquiries stay on your credit report for two years.  However, most credit reports obtained by lenders only show the credit inquiries made in the last six months.  The score factors in the amount of time that has elapsed since you applied for credit.  Typically, credit inquiries more than 4 to 6 months old have little or no impact on the score.

Your own credit report requests, credit inquiries made by businesses to offer you goods or services, or inquiries made by your existing creditors do not count toward your credit score. Credit checks by prospective employers also do not count. These types of inquiries, referred to as “soft inquiries” may appear on your credit report, but they don’t affect your score.  Find out more in the “How do Inquiries Affect My Score” section of the Credit Library.

• Cosigner Accounts - When you cosign on a loan for someone you know, you accept the financial responsibility for that loan in the event the borrow doesn’t pay.   Accounts that you cosign for are reported on your credit report… like it or not.  If the borrower is more than 30 days late on the account, this gets reported on your credit report.  As far as your credit score is concerned, it makes no difference if you are the borrower or cosigner.  The effect is the same.  Read more about “Should I Cosign for a Loan?” in our Credit Library.
• Divorce Issues - Without question, divorce is the cause of many people’s poor credit… at no fault of their own, other than possibly the decision making process used in selecting their mate???  What most people don’t understand is that joint accounts are still reported on both ex-spouses credit reports even though the court ordered one spouse to have the financial responsibility of said accounts.

How can this be?  Simply this; contract law supersedes a divorce order.  In other words, a divorce order doesn’t negate a contract entered into previously.  Does this mean that the divorce order has no affect?  Absolutely not.  If the ex-spouse that was ordered to accept financial responsibility for the account doesn’t pay, the other ex-spouse can file a motion of contempt with the court.  If this doesn’t get them to pay, ultimately the irresponsible ex-spouse could be found in contempt of court and sent to jail.

However, the creditor still has the right to pursue repayment from both parties, and get a judgment if necessary against either or both.  Hence, the creditor can and does report the account on both ex-spouses credit reports.  Learn more about “How Does Divorce Affect My Credit” in our Credit Library.

• Mixed Files (Other People’s Accounts) - It is not uncommon for another person’s accounts to show up in your credit report.  In fact, this happens to about 1 in 20 people. This can happen for a variety of reasons.  Most common is the scenario of John Doe, Jr. and John Doe, Sr.  Because they are the same name and have shared the same address in many cases while junior was growing up, it happens quite often for the accounts of one to show up on the other’s credit report.

Another reason someone else’s accounts may show up on your report is simply that the name is the same or similar.  Again, even sharing the same address with someone can result in their items showing on your report.

These examples are the result of “mixed files” at the CRA.  A mixed file is data pulled from two different individuals into a single credit report. The reason this happens is actually by design to protect the credit grantor.  Essentially, the CRAs want to ensure that they don’t leave anything out when a credit grantor pulls your credit.  A credit grantor’s decision to extend you credit is largely determined on what’s in your credit report, and if information is missing because the CRA failed to report it, and if you default on your loan, the credit grantor is going to blame the CRA.

To limit their liability the CRAs have set up their systems to search for data based on “partial matches” from among as many as a dozen “matching elements”, such as; social security number, a partial social security number, birth date, first name, variations of first name, last name, address street name, address number, city, state, zip and more.

The end result is that the system is set up to provide “over-disclosure” and err in favor of the credit grantor and protection of the CRA.  Even if it means that you get denied credit because of someone else’s information showing on your credit report.

It is critical to get this type of error corrected, even if you may have positive accounts showing on your report that don’t belong to you.  Positive accounts can become negative in the future if payments are missed.  Also, if they carry a balance, then it can hurt your financing capability based upon your total debt and monthly payments.  To learn more about mixed files visit About Mixed & Multiple Files in our Credit Library.

• Identity Theft - This is a growing problem in America, leaving people not only feeling violated, but damaging their credit as well.  It’s becoming more common for people to review their credit report and discover that new accounts have been opened in their name… and they never new it.

Another increasing occurrence of identity theft is happening in the form of income tax liens.  This is due to your social security number being used by someone else and having income reported to them for tax purposes.  You end up filing your taxes as usual, only to find that you owe more because of income you didn’t report.  Remember, the government gets copies of the W-2s and 1099s, not just you.  So, you wind up owing the IRS and probably State government taxes; which if you don’t pay, ends up being a tax lien and showing on your credit report.  Visit our “Identity Theft” section of our Credit Library to learn more about this terrible crime.

Disclaimer: The information provided in this site is not legal advice. All information is general information, some of which pertains to legal issues involved in the subject matter. Credit Matters Inc. is not a law firm and is not a substitute for an attorney or law firm. Your access to and use of this site is subject to additional terms and conditions.

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