A: Credit reports are necessary because they provide the information that helps consumers apply for and obtain credit to make purchases, secure loans, pay for college educations, and manage their personal finances. Credit reports also make it possible for stores to accept your checks, and for banks to offer credit and debit cards. On a larger scale, credit reports actually help businesses to market more products and help corporations to better manage their operations to benefit the world's economy.
Q: What is a credit inquiry?
A: An “inquiry” is a listing of the name of a creditor/grantor or other authorized user who has accessed your credit file. Each inquiry is posted to the credit file so that you know who has obtained a copy of it. Credit grantors post an inquiry before offering you a pre-approved credit card application. These are listed as "promotional" inquiries on your credit file because only your name and address were accessed, not your credit history information. Inquiries are not sent to credit grantors or businesses for reasons of credit reporting. They are listed for your informational purposes only.
Q: What is the Fair Credit Reporting Act and how does it benefit you?
A: The Fair Credit Reporting Act (FCRA) is the federal law regulating the credit industry, including the credit reporting companies like Equifax, Experian, and Trans Union. It has been in effect since 1971. A revised FCRA became effective October 1, 1997. This law protects consumers' rights, such as the right to review and contest information in their credit profiles. It also specifically defines who can access the information in a credit profile, and how you are notified of this activity. You may obtain a copy the FCRA from the Federal Trade Commission.
Q: Does a divorce affect consumer credit?
A: A divorce decree does not supersede the original contract with the creditor and does not release you from legal responsibility on any accounts. You must contact each creditor individually and seek their legal binding release of your obligation in that file and account. Only after that release can your credit history be updated accordingly. Even if a divorce decree states that an obligation is no longer the responsibility of one of the parties, the creditor will keep that party obligated until the remaining party applies for that account individually or the party trying to remove itself as responsible is granted that request by the creditor. This includes those instances when a mortgage deed is released by “quit-claim.” Both of the spouses are still obligated on the “Note” until such time as the responsible party qualifies with the mortgage lender as the individual and separate borrower.
Q: Should I use one of those “credit-fix-it” companies that promise to help correct my credit?
Beware of companies that promise to remove accurate information from your credit file. Accurate information cannot be removed from a credit file. There is nothing they can do for you that you cannot do for yourself by contacting the credit reporting agencies directly. You may employ one of these companies to assist you, but be careful. Only time will heal a delinquent credit history. If such a company claims they can remove bad histories, it would most likely be done fraudulently!
Q: What if an item on my credit profile appears to be correct, but I disagree with its being reported?
A: For those items in your credit profile which you feel you need to explain further (such as an account that was paid late due to the loss of job, military call-up, unexpected medical bills, a divorce, etc.), you can send a brief statement to each of the appropriate credit reporting agencies. The information will (in most cases) be placed on your credit profile and will be disclosed on your report each time your credit profile is pulled.
Q: What are FICO scores?
A: FICO scores were developed by Fair Isaac & Company, Inc. for each of the credit repositories. The scores are: (for Equifax) Beacon, (for Experian, which was formerly TRW) Experian/FICO, and (for TransUnion) Empirica. They are simply scores that are derived from the information contained in a person's credit file only. They do not consider other issues like a person’s income, savings, or the amount of a down payment for a mortgage. They strictly consider credit.
The scores were designed to help assess risk in granting credit. The higher the score, the lower the indicated risk to the creditor/grantor. They are useful in directing applications to specific loan programs and for setting levels of underwriting--i.e., streamline, traditional, or second review. The scores are objective, consistent, and for the most part, accurate (they help to keep any possible favoritism or discrimination at bay). They are the best guide available to future risk based solely upon credit report data. No score says whether a specific individual is a “good” or “bad” customer--they simply tell a creditor what the credit history shows.
The strategy from one lender to the next may vary as to how they make their lending decisions, but it is important to note that a credit score does not determine in and of itself whether a loan will be underwritten. Scoring is just one of the variables measured in the final decision...albeit arguably the greatest factor.
Many in the mortgage business are very skeptical about the accuracy of credit scores because it is suspected that much of the information is inaccurate at times. Scoring has only been used in the mortgage process in the past few years. That said, credit scores have been in use since the 1950s by retailers, credit card companies, insurance companies, and banks for consumer lending. The data from large sections of consumer credit histories emphasize the accuracy and the predictive quality of the scores. Large portfolios have been scored for mortgage servicing and investment groups, and again, they prove the overall accuracy of the FICO scores.
The scores were developed from each repository's database using actual loan performance. A sample of over 750,000 consumers per repository was used. The repositories have each made great strides in increasing the accuracy of their respective databases through computer technology and internal monitoring. There is a new standard reporting format for credit grantors to use when sending electronic information to the repositories; this is the critical first step to providing accurate data. By comparing hundreds of thousands of credit files, the scores very accurately determine future credit risk.
