UNDERSTANDING CREDIT SCORE & CREDIT REPORTS – A Comprehensive Guide for Consumers
Your credit report plays a critical role in nearly every financial aspect of your life. From securing loans to renting apartments, and even influencing job opportunities, understanding your credit report is key to managing your financial well-being.
This guide will walk you through how credit reports work, how late payments affect your credit, and the steps you can take to ensure your credit report remains accurate and fair.
What is a Credit Report and How Does It Work?
Your credit report is a detailed record of your borrowing and repayment history. It’s maintained by the three major credit reporting agencies: Experian, Equifax, and TransUnion. These agencies collect information from lenders and public records to create a comprehensive profile of your financial activity. Here’s what your credit report typically contains:
Personal Information: Includes your Social Security number, birth date, addresses, and employment history.
Credit Accounts: Details on open and closed credit accounts, such as mortgages, credit cards, auto loans, and student loans. This includes information about the type of account, current balance, payment history, and whether the account is in good standing.
Inquiries: Records of anyone who has requested your credit report in the past year or two. These include “hard” inquiries (which impact your credit score) from lenders when you apply for credit, and “soft” inquiries (which do not impact your score), such as when a creditor checks your credit for pre-approval offers.
Public Records and Collections: Records of bankruptcies, foreclosures, repossessions, and accounts that have been sent to collections.
Each creditor reports your account status monthly, and this data is then reflected in your credit report. This information is critical for lenders, landlords, and even some employers to determine your creditworthiness.
What is a Credit Score, and Why Does It Matter?
Your credit score is a numerical value that lenders use to assess your creditworthiness. Note, there a lots of different credit scores from different companies, used for various purposes - i.e., a different credit score will be used for when you apply for a car loan versus when you apply for a mortgage.
Your credit score merely provides a general overview of your credit history, not a complete picture.
FICO Credit Score – the most commonly used Model
The most widely used scoring model is FICO, which ranges from 350 to 900. Here’s a breakdown of how your FICO score is calculated:
Payment History (35%): Late payments can significantly damage your score, making it the most important factor.
Credit Utilization (30%): This refers to how much of your available credit you are using. High utilization can lower your score.
Length of Credit History (15%): The longer your credit history, the better your score.
New Credit Accounts (10%): Opening too many accounts in a short period can negatively impact your score.
Credit Mix (10%): Having a diverse mix of credit types, such as mortgages, credit cards, and auto loans, can boost your score.
Understanding how each factor influences your score can help you make informed decisions to maintain or improve your credit.
How Late Payments and Collections Affect Your Credit Score
Missing payments can severely damage your credit score. Here’s how the timeline of missed payments impacts your score:
30 Days Late: Your score takes its first significant hit.
60 and 90 Days Late: The damage to your score continues to worsen.
120+ Days Late: At this point, the account may be “charged off” by the lender, meaning they consider the debt uncollectible and report it as a loss for tax purposes. Charged-off accounts often result in the debt being sold to a collection agency, which further impacts your credit score.
Once a debt is in collections, the damage to your score is already significant, and continued non-payment won’t make much difference. However, the collection account will remain on your report for up to seven years unless you negotiate its removal with the collector. This is particularly important when dealing with medical debt, as the rules surrounding these types of collections have recently changed.
Special Considerations for Medical Debt and Other Utility Bills
Recent changes to how medical debts are reported have eased the burden on consumers. As of March 2023, the three major credit bureaus no longer report medical debts under $500. Additionally, medical debt that has been outstanding for less than one year is also excluded from credit reports. This means that while medical debt can still hurt your credit score, the impact has been lessened under the new regulations.
Utilities, such as gas, electric, and water services, generally don’t report delinquent payments until the account is sent to a collection agency. Therefore, being late on a utility bill may not immediately affect your credit score, but failure to pay can still result in collections and long-term damage to your report.
How to Review Your Credit Report and Dispute Errors
It is essential to regularly review your credit report for accuracy. Federal law entitles you to one free copy of your report from each of the three major credit bureaus annually. To request your free reports, visit AnnualCreditReport.com. Alternatively, you can request your reports by phone or mail:
• Call 877-322-8228
• Mail your request to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281
When reviewing your credit report, pay close attention to:
• Personal Information: Ensure that your name, Social Security number, and address are correct.
• Account Information: Verify that all accounts belong to you and are accurately reported.
• Inquiries: Make sure that all hard inquiries were authorized by you.
If you spot any errors, you have the right to dispute them with the credit bureau. Under the Fair Credit Reporting Act (FCRA), the credit bureau must investigate your claim within 30 days and correct any inaccuracies. Be sure to document all communication with the bureau and retain copies of any supporting documentation.
Beware of Subscription-Based Credit Monitoring Services
Many credit bureaus offer credit monitoring services as part of subscription packages. While these services may seem useful, they often provide little value for the cost. They are also not as effective as security freezes in preventing identity theft. Additionally, subscription plans can become expensive over time, and some companies, such as Experian, may require you to waive your right to sue over serious credit report errors if you enroll in their services. Therefore, it is essential to be cautious when signing up for these packages.
What to Do If Your Credit Report Contains Negative Information
If your credit report contains negative information, such as late payments or collections, it will typically remain on your report for seven years. Bankruptcies, however, remain on your report for ten years from the date of filing. While you can’t remove accurate negative information before the time limit expires, you can take steps to improve your credit over time. This includes paying down existing debts, avoiding new debt, and ensuring that all future payments are made on time.
How R23 Law’s California Credit Reporting Lawyers Can Help
Errors on your credit report can be stressful, especially when they prevent you from achieving important financial goals like buying a home or securing a loan. At R23 Law, our California Credit Reporting Lawyers specialize in disputing credit report errors and protecting your rights under the Fair Credit Reporting Act. We can help you navigate the complex process of disputing errors, negotiating with creditors, and ensuring that your credit report reflects accurate information.
If you’re dealing with errors on your credit report or have questions about how to improve your credit score, contact R23 Law today for a free consultation. With years of experience in consumer protection law, we’re here to fight for your financial future.
