Credit

Your credit history is a record of your past and current credit activities, used to determine your credit score. Learn about how credit works, how to improve your score, and more.

What is a Credit History?

Your credit payment history is recorded in a file or report. These reports are maintained and sold by consumer reporting agencies (CRAs), commonly known as credit bureaus. If you’ve ever applied for a credit or charge account, personal loan, insurance, or a job, you have a credit record on file.

What’s in Your Credit Record?

Your credit record includes information about your income, debts, and payment history. It also shows if you’ve been sued, arrested, or filed for bankruptcy. Understanding your credit report can help you manage your financial health better.

VA (Veterans Affairs) loans offer benefits to those who have served in the military. Here’s a breakdown of who qualifies:

Veterans

Veterans who have served active duty and were discharged under conditions other than dishonorable are eligible. The specific length of service requirement depends on the time period and type of service.

Active Duty Service Members

Current active duty service members who have served a minimum period, typically 90 continuous days during wartime or 181 days during peacetime, can qualify.

National Guard and Reserve Members

Members of the National Guard and Reserves are eligible if they have completed six years of service or have been called to active duty for at least 90 days.

Surviving Spouses

Unremarried spouses of veterans who died in service or as a result of a service-connected disability are eligible. Some remarried spouses may also qualify if they remarried after a certain age or date.

Other Considerations

• Certificate of Eligibility (COE): To apply for a VA loan, you need a COE, which proves your eligibility. You can obtain this through the VA or your lender.
• Credit and Income Requirements: While VA loans have flexible credit and income guidelines, you must still meet the lender’s criteria.

VA loans provide a valuable benefit to those who have served, making homeownership more accessible with favorable terms and conditions.

Yes, you do. If you ask, the credit reporting agency (CRA) must tell you everything in your report, including medical information and, in most cases, the sources of that information. Additionally, the CRA must provide a list of everyone who has requested your report within the past year, and for employment-related requests, within the past two years.

Identification and Employment Information

Credit bureaus routinely note your name, birth date, Social Security number, employer, and spouse’s name. They may also provide details about your employment history, home ownership, income, and previous addresses if a creditor requests this information.

Payment History

Your accounts with various creditors are listed, showing the amount of credit extended and your payment history. This includes whether you’ve paid on time or if overdue accounts have been referred to collection agencies.

Inquiries

Credit bureaus keep a record of all creditors who have requested your credit history in the past year. They also maintain a record of those who have asked for your credit history for employment purposes over the past two years.

Public Record Information

Events that are part of public records, such as bankruptcies, foreclosures, or tax liens, may appear in your credit report. This information can significantly impact your credit score and borrowing ability.

Credit scoring is a system creditors use to decide if they should give you credit. It involves collecting information about your credit experiences, such as your bill-paying history, the number and type of accounts you have, late payments, collection actions, outstanding debt, and the age of your accounts. This data is gathered from your credit application and credit report.

How Credit Scoring Works

Using a statistical program, creditors compare your information to the credit performance of other consumers with similar profiles. The credit scoring system awards points for each factor that helps predict who is most likely to repay a debt. The total number of points, known as a credit score, indicates your creditworthiness or how likely you are to repay a loan on time.

FICO Scores

The most widely used credit scores are FICO scores, developed by Fair Isaac Company, Inc. Your FICO score ranges from 350 (high risk) to 850 (low risk).

Importance of Accurate Credit Reports

Since your credit report plays a significant role in credit scoring, it’s crucial to ensure its accuracy before applying for credit. You can get copies of your credit report from the three major credit reporting agencies:

• Equifax: (800) 685-1111
• Experian: (888) EXPERIAN (397-3742)
• TransUnion: (800) 916-8800

These agencies may charge up to $9.00 for your credit report.

Free Annual Credit Reports

You are entitled to one free credit report every 12 months from each of the nationwide consumer credit reporting companies: Equifax, Experian, and TransUnion. This free report, which may not include your credit score, can be requested through AnnualCreditReport.com.

​Credit scoring is used because it is based on real data and statistics, making it more reliable than subjective or judgmental methods. Here are the key reasons why credit scoring is preferred:

Developing a credit scoring model involves a few key steps to ensure it accurately predicts creditworthiness:

Sample Selection

First, a creditor selects a random sample of its customers. If the sample size isn’t large enough, a similar group of customers may be used. This sample is analyzed statistically to identify characteristics that relate to creditworthiness.

Factor Analysis

Next, each identified characteristic is assigned a weight based on its predictive strength. These factors help determine who is likely to be a good credit risk.

Custom Models

Each creditor may develop its own credit scoring model or use different models for different types of credit. Some may also use generic models created by credit scoring companies.

Legal Requirements

Under the Equal Credit Opportunity Act, certain characteristics cannot be used in credit scoring systems, such as:

• Race
• Sex
• Marital status
• National origin
• Religion

Creditors can use age in scoring systems, but these systems must be properly designed to ensure equal treatment of elderly applicants.

Summary

Credit scoring models are developed through statistical analysis of customer samples, assigning weights to predictive factors. These models comply with legal requirements to ensure fair and objective credit evaluations.

Credit scoring systems are highly reliable because they allow creditors to evaluate many applicants consistently and impartially. Here’s why they work well:

Consistency and Impartiality

Credit scoring systems assess multiple characteristics of applicants consistently and without bias. This helps ensure fair treatment across a large number of applicants.

Statistical Validity

For a credit scoring system to be statistically valid, it must be based on a large enough sample. This ensures that the model accurately predicts creditworthiness.

Variability Among Creditors

Remember, credit scoring systems can vary from one creditor to another. Each may have its own criteria and thresholds.

Faster and More Accurate Decisions

While a credit scoring system might seem impersonal, it enables quicker, more accurate, and impartial decisions compared to individual judgments. Properly designed systems can handle large volumes of applications efficiently.

Handling Marginal Cases

Many creditors have provisions for marginal cases. Applicants whose scores are borderline are often referred to a credit manager. This manager can then decide whether to extend credit, allowing for discussion and negotiation with the consumer.

Summary

Credit scoring systems are reliable tools for evaluating credit applications. They provide consistency, impartiality, and efficiency, while also allowing for human discretion in marginal cases.

Improving your credit score involves understanding and addressing the factors that credit scoring models evaluate. These models are complex and vary among creditors, but here are some general steps you can take:

Pay Your Bills on Time

Your payment history is a major factor in your credit score. Late payments, accounts sent to collections, or bankruptcies can negatively impact your score. Always pay your bills on time to improve your score.

Reduce Outstanding Debt

Scoring models look at how much debt you have compared to your credit limits. If your balances are close to the limits, it can hurt your score. Work on paying down your debt to improve your credit utilization ratio.

Build a Long Credit History

The length of your credit history matters. A longer history of responsible credit use will benefit your score. Even if you don’t have a long history, making timely payments and keeping balances low can offset this.

Be Cautious with New Credit

Applying for new credit can result in “inquiries” on your credit report, which can lower your score if there are too many recent ones. Not all inquiries are counted, though; inquiries for account monitoring or prescreened offers don’t affect your score.

Manage Your Credit Accounts

Having a variety of credit accounts, like credit cards and loans, can be positive, but too many credit cards can hurt your score. Also, loans from finance companies may negatively impact your score in some models.

Additional Factors

Some models consider other information from your credit application, like your job, length of employment, and homeownership. These can also influence your credit score.

Steps to Improve Your Credit Score

1. Pay on Time: Always pay your bills by their due dates.
2. Reduce Balances: Pay down outstanding balances and avoid maxing out your credit limits.
3. Avoid New Debt: Be cautious about opening new credit accounts.
4. Monitor Your Credit: Regularly check your credit report for errors and dispute any inaccuracies.

Improving your credit score takes time and consistent effort. Focus on maintaining good financial habits, and you’ll see your score improve gradually.

If you’re denied credit or don’t get the terms you want, it’s important to understand why and how you can improve your chances next time. Here are some steps to take:

Ask About the Credit Scoring System

First, ask the creditor if they used a credit scoring system. If they did, find out what characteristics or factors were used and ask how you can improve your application. Even if you get credit, ask if you’re receiving the best rate and terms available, and if not, why.

Understanding Denial Reasons

If you’re denied credit, the Equal Credit Opportunity Act requires the creditor to provide a notice explaining the specific reasons for rejection, or informing you of your right to ask for the reasons within 60 days. The reasons must be specific, such as “Your income was low” or “You haven’t been employed long enough.” Vague reasons like “You didn’t meet our minimum standards” or “You didn’t receive enough points on our credit scoring system” are not acceptable.

Addressing Credit Limits and Accounts

If the denial is due to being too close to your credit limits or having too many credit card accounts, consider paying down balances or closing some accounts before reapplying. Credit scoring systems are dynamic and will reflect these changes over time.

Information from Credit Reports

Sometimes, credit denial is based on information in your credit report. In this case, the Fair Credit Reporting Act requires the creditor to provide the name, address, and phone number of the credit reporting agency (CRA) that supplied the information. Contact the CRA to find out what your report says. This information is free if requested within 60 days of being turned down for credit. The CRA can tell you what’s in your report, but only the creditor can explain why your application was denied.

Improving Your Chances

To improve your chances of getting credit in the future:

1. Dispute Inaccuracies: If you find inaccuracies in your credit report, dispute them with the CRA.
2. Improve Key Factors: Work on factors like paying bills on time, reducing debt, and maintaining a healthy credit mix.
3. Reapply After Changes: Once you’ve made improvements, consider reapplying.

Understanding the reasons for credit denial and taking steps to address them can help you improve your creditworthiness and get better terms in the future.

The Fair Credit Reporting Act (FCRA)

The Fair Credit Reporting Act (FCRA) ensures that consumer reporting agencies (CRAs) provide accurate and complete information to businesses when evaluating your credit application. Here are your key rights under the FCRA:

Your Rights Under the FCRA

1. Right to Your Credit Report
   • You have the right to receive a copy of your credit report. This copy must include all information in your file at the time of your request.
2. Right to Know Who Accessed Your Report
   • You have the right to know the names of anyone who received your credit report in the past year for most purposes, or in the past two years for employment purposes.
3. Right to Information on Denied Applications
   • If a company denies your application based on information from a CRA, they must provide the name and address of the CRA that supplied the information.
4. Right to a Free Report After Denial
   • If your application is denied due to information from a CRA, you are entitled to a free copy of your credit report. You must request this within 60 days of receiving the denial notice.
5. Right to Dispute Inaccuracies
   • If you believe your credit report contains incomplete or inaccurate information, you can file a dispute with both the CRA and the company that provided the information. Both parties are legally required to reinvestigate your dispute.
6. Right to Add a Summary Explanation
   • If your dispute is not resolved to your satisfaction, you have the right to add a summary explanation to your credit report.

Summary

The FCRA gives you several important rights to ensure the accuracy and fairness of your credit information. By understanding and exercising these rights, you can help protect your credit reputation and ensure that your credit applications are evaluated based on accurate data.