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Tuesday, February 9, 2010

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Home > Consumer Resources > Consumer Publications > Your Credit Rating

Your Credit Rating

What It Is and Why It Is One of Your Most Valuable Possessions

Your credit rating is drawn from your credit report, which is a profile of your borrowing, charging, and repayment activities. National and local consumer reporting agencies (also called credit bureaus) gather data from banks, finance companies, merchants, and credit card providers to assemble a computerized credit snapshot. A good rating helps you accomplish financial goals; a poor rating limits your financial opportunities.

It is important to understand that credit represents a loan, not a gift. It has to be repaid, often with interest, and the longer you take to repay a credit expenditure, the more expensive it will be. Protect your credit rating by paying bills on time and limiting the amount of debt you take on so you can keep up with payments.

Credit reports include:

• Identifying information: your name, address, employment, Social Security number, birth date, dependents, and, if you are married, similar information for your spouse;
• Credit information: installment and home improvement loans, as well as revolving credit accounts you have with banks, retailers, finance companies, and other lenders, including the type and terms of the credit, outstanding balances, most recent payment, and past-due amounts;
• Public record information: court data regarding monetary (and sometimes nonmonetary) judgments, such as bankruptcy proceedings and tax liens; and
• Inquiries: a list of those who recently have requested copies of your credit report.

How Your Credit Report Is Used

Credit reports contain very personal information. For this reason, access to them is limited. Your report may be released for a legitimate business need, such as an application for credit, employment, a government license, or life insurance; in response to a court order; or to a third party you designate in writing, such as a potential landlord.

When you apply for a car loan, mortgage, or credit card, your report is reviewed by the lender to evaluate your creditworthiness. They are also used by potential employers and life insurance companies to round out their knowledge with details of how you incur and manage financial responsibilities.

Since your credit report influences whether you are able to buy a home and get a job, it is extremely important to protect your credit rating by making loan and bill payments on time and by not taking on more debt than you can handle. After paying your basic expenses (rent, food, utilities, tuition, medical), you should have enough left to make your monthly credit payment. Ideally, even after paying all of your bills, you should have funds left for saving and investment.

It is also worthwhile to review your report periodically by ordering a copy from one (or more) of the major credit bureaus that compile credit reports; a listing appears at the end of this brochure. By doing so, you can be certain that the information on the report is current and correct. You can receive a free credit report from each of the major credit bureaus (Equifax, Experian, and TransUnion) once every 12 months. There is also no charge for obtaining your report if you have been denied credit.

What to Do About Errors on Your Report

Consumer reporting agencies gather the information that appears on credit reports from many sources, and with so much data flowing back and forth errors may occur. Information for people with similar names or Social Security numbers can inadvertently be added to your report, or your information can be recorded incorrectly. No matter how they occur, it is important to correct errors quickly.

First, notify the consumer reporting agency in writing. The agency is then responsible for investigating and modifying or removing inaccurate data; this process may take as long as 30 days. At your request, the agency must also reissue corrected reports to lenders who received your report within the past six months, or employers who received it in the last two years.

If you are not satisfied with the correction, you have the right to add a brief statement to your credit report about the disputed data. Your statement should be used to clarify inaccuracies, not to explain reasons for delinquency.

Should you be denied credit because of information in your report, the lender is required to give you the name, address, and telephone number of the bureau that produced the report.

You then have 60 days to request a free copy of your report. The consumer reporting agency must disclose to you the information in the report, its source, and recipients over the past year (two years if for employment purposes).

Negative Information on Your Report

All your credit history information, good and bad, remains on your report for seven years. This period is counted from the time of the last action — meaning the last payment, closing, chargeoff by a creditor, placement with a collection agency, or initiation of a lawsuit, judgment, or tax lien. If you file for personal bankruptcy, that fact remains on your credit report for 10 years.

Even if you haven’t filed for bankruptcy, late and missed payments will show up on your credit report and hurt your chances of being approved for credit, life insurance, or employment. The best way to improve a poor credit report is to regain control of spending and debt. To find out about organizations in your area that help consumers resolve credit problems and establish a budget, call the National Foundation for Credit Counseling’s member agency locator (800) 388-2227. Additional information on improving a credit rating can be found in How to Establish, Use, and Protect Credit, a brochure by the Federal Reserve Bank of Philadelphia.

National Consumer Reporting Agencies

The major consumer reporting agencies are listed below. To request a copy of your credit report, contact the agency by mail or phone, or order your report online.

Note that there may be differences among the reports produced by different agencies. In order to have a complete picture of your credit history, you need to obtain a report from each of the major agencies. This can be done free of charge once every 12 months.

• Equifax
  P.O. Box 740241
  Atlanta, GA 30374
  (800) 685-1111
• Experian
  (888) 397-3742
• TransUnion
  P.O. Box 2000
  Chester, PA 19022
  (800) 888-4213

To Obtain Free Credit Reports

Equifax, Experian, and TransUnion have established a single website and toll-free telephone number for requesting a free credit report once every 12 months from each agency:

• AnnualCreditReport.com
• Toll-free number: 1-877-322-8228

To obtain paper copies of this brochure, please contact:

Federal Reserve Bank of Philadelphia
Public Affairs - Publications
P.O. Box 66
Philadelphia, PA 19105-0066
(215) 574-6115