The ABCs of credit reports

Frequent checking of scores may help eradicate errors
By: Robert J. Bruss: Inman News
My extensive "research" for this report included obtaining my current credit reports from the three nationwide credit bureaus – Experian, Trans Union, and Equifax – plus obtaining my FICO (Fair, Isaac and Co.) scores from these three credit bureaus. I invested $44.95 on the Internet at http://www.myfico.com/ for this information. I could have purchased just one credit report there for $14.95, including my FICO score, but it would not have been complete. Most mortgage lenders obtain a 3-in-1 combined credit report on prospective borrowers so I checked all three of my credit reports.

Each credit bureau had different information and a different FICO score. Not all credit card companies, department stores, banks and other creditors report your credit activity to all three credit bureaus. Some creditors don't report your credit history to any credit bureau, presumably because they want to keep your good (or bad) credit to themselves. This can hurt if you are trying to establish credit because your credit card company, department store or gasoline company doesn't report your on-time payments.

To my surprise, my FICO scores from the three credit bureaus vary significantly. Trans Union says my FICO score is 769. Equifax reports my 771 FICO score. But Experian calculated a 799 FICO score. Each FICO credit report included my strong credit points and my weak points.

Ironically, Experian, where I had the best credit score, made the worst comments about me: "The proportion of balances to credit limits (high credit) on your revolving/charge accounts is too high. The amount owed on your accounts is too high." But my Equifax report emphasized, "You have no late payments reported on your credit accounts, you demonstrate a relatively long credit history, and you have a low proportion of balances to credit limits (high credit) on your revolving/charge accounts." Equifax added, "You have too few/too many accounts being reported on your file (I have 33 credit accounts, most with zero balances, whereas average U.S. consumers have 11 current credit accounts)." Finally, Trans Union said, "You have no late payments reported on your credit accounts and you have a low proportion of balances to credit limits (high credit) on your revolving/charge accounts," but "The amount owed on your accounts is too high." At least I liked their FICO scores!

FICO says consumers in my score range of 750-799 have a delinquency rate of 2 percent. But FICO scores below 500 have an 83 percent default rate, 500-529 shows a 72 percent delinquency rate, in the 550-599 range there is a 52 percent probability of delinquency, 600-649 scores show a 31 percent delinquency rate, and 650-699 have a 15 percent delinquency rate. Over 700 the delinquency rate drops to 5 percent up to 749. If your FICO score is 800 or over, you have a 1 percent delinquency likelihood.

The median FICO score is 723 – meaning an equal number of individuals have FICO scores above and below that number. Most mortgage lenders consider a FICO score above 680 will entitle you to the lowest interest rate. The www.MyFICO.com Web site provides lots of valuable insights on how to improve your FICO score.

Virtually all creditors now use FICO scores to rate credit and mortgage applications. But each creditor's criteria vary widely. For example, I understand Home Depot won't issue its credit card to an applicant with a bankruptcy within the last 10 years. But most other creditors will approve credit if the bankruptcy has been discharged (although the borrower's interest rate won't be the lowest).

However, a major FICO flaw is their scores do not consider your income, savings, IRA and retirement accounts in relationship to your credit. FICO scores only weigh the length of your credit history, on-time payments (even one late payment beyond 30 days hurts FICO scores), number of credit accounts, percentage of balances to available credit, collections, derogatory public records (such as judgments and unpaid property taxes), and number of recent credit inquiries with the past six months.

Before applying for credit, it is very smart to invest, as I did, in your 3-in-1 credit reports and FICO scores. Incidentally, your own personal credit report purchases do NOT show up or count as an "inquiry," which can hurt your FICO score if you have too many inquiries by creditors in the last six months.Although you can go to each credit bureau's individual Web site to obtain your credit report and their version of your FICO score, the easiest and best place to obtain all this information is at http://www.myfico.com/. Maybe your credit reports and FICO scores are better than you think.

If you find mistakes that are hurting your FICO score, each credit bureau includes either an online, telephone or mail procedure to correct the errors. Be sure to follow up because the credit bureaus are not famous for great customer service! After you register an error, by federal law each credit bureau has 30 days to either verify their information is correct or remove unverified information. Ask for a free corrected copy of your credit report after the error is removed.

EXAMPLE: Several years ago, I sold a rental house at about the same time the property taxes were due. The title company was supposed to pay my property taxes so title could be delivered to the buyer free of any unpaid property taxes. But the title company failed to pay the property taxes! After a few months, the unpaid property taxes showed up on my credit reports. When I asked the title company to take care of the problem, they argued the property taxes were paid.

But the local tax collector insisted they were unpaid. Eventually, the title company paid the property taxes, plus the 10 percent penalty for late payment. Then I had to get those unpaid property taxes removed from my credit reports. If I had been applying for a mortgage or other credit, that delay of several months to clean up my credit reports would have meant I probably couldn't get a mortgage.

Before leaving the topic of credit reports, I hasten to add, by the end of 2005, everyone will be entitled to one free credit report from each of the three nationwide credit bureaus – Trans Union, Experian, and Equifax. So far, only residents of the Western and Midwestern states can use this new program. But, for many years, by state law the residents of Colorado, Georgia, Maryland, Massachusetts and Vermont have been entitled to one free credit report each year from each credit bureau. To obtain your free credit report from any of the three credit bureaus (but not including your very important FICO score), go to https://www.annualcreditreport.com/cra/index.jsp or phone 1-877-322-8228.