Creditors and your credit information
Credit information is analyzed somewhat differently by each lender or creditor and can be affected by many factors. Most consumers do not understand how the system works and often take steps in the mistaken belief that it will improve their credit scores.
The entire credit reporting system is voluntary and is for the benefit of all lenders as well as consumers. It is based upon trust and the integrity of the information. The improper removal of accurate data would undermine the entire system, which is why creditors are prohibited from removing negative but correct information from your credit file. Creditors are bound by federal law to report accurate information and also by contracts with the credit reporting agencies to do so.
The entire system is based upon the sharing of information so lenders can make sound decisions. The system helps people obtain credit at the lowest possible costs, so it is valuable as a tool to mitigate risk. The credit reporting system is an integral part of business, and depends upon everyone cooperating. These fundamental principles are why most credit repair organizations are ultimately a scam, because they cannot make bad credit good if the underlying data is accurate.
Actions that can affect credit scores:
- Use of ATM, debit, or prepaid credit cards will have no affect because they are not reported, but use of secured cards can help in building a good credit history;
- If you close accounts, your credit score will be adversely impacted;
- If you do not need credit, do not apply for it. It is especially important not to open accounts just because they are offering you a discount, such as in a department store. Unless you are going to make a lot of purchases, these accounts hurt your credit;
- The utilization ratio of your credit accounts is important. If you close one or more accounts, your utilization of credit ratio will go up, and have a negative effect on your score;
- If you are going to be applying for credit, leave your accounts alone. Utilization is a better indicator of risk in comparison to how many open accounts you have;
- High school kids should establish a credit history as a joint cardholder, not as a separate account;
- Pay all your bills on time, including utilities and rent;
- Credit inquiries can hurt your credit. Too many “hard” credit inquiries on your account signals distress;
- Do not drive up your credit limits, and only use a maximum of 30% of your credit limits on each account;
- Open credit cards have a positive impact on your credit, so long as you do not exceed the 30% limits rule;
- More weight is given in your credit score to open accounts;
- Dormant accounts, or paid and closed and never-late will not boost your score;
- Do not have any delinquency or derogatory information;
- Do not continue to have zero balance accounts. Make a charge periodically to show some activity;
- Do not close all cards at once, but on a random basis if you want to reduce the number of credit cards you have. Your credit score is looking at what is active;
- Your creditor will add up all your account balances to determine whether you are over-extended;
- Do not leave debts unpaid, even if late;
- If you make a settlement agreement with a creditor, get it in writing;
- When you pay a debt, it does not mean it will be removed from your credit report if it was late, or settled;
The following specific issues will always hurt your credit:
- Too many credit cards;
- Debt ratios;
- Slow payment history;
- Late payment history;
- Defaults and write-downs
- Judgments and liens;
How long information is stored in your file
Information is stored on the system for up to ten years, depending upon its classification
- Credit items, credit cards, bank accounts, and every late-pay will remain for seven years;
- The status of an account as paid, closed, never-late will appear for ten years from date of closure;
- Open, never-late remains forever;
- Payment history and closed account, ten years;
- Credit inquiries remain for two years and one month;
- Current creditors have a right to review your credit files. These will not show up on your repot as hard inquiries but will also remain for 25 months. They will not affect your credit scoe;
- Merchants are required to either fix a disputed item, or respond within 30 days of being notified;
According to Rod Griffin, the Director of Public Education at Experian, here is what many illegitimate credit repair companies really do in the guise of helping their clients:
- They send hundreds of disputes to credit reporting agencies. They rely on the fact that some creditors may miss the 30 day mandatory response period, which requires the CRA to suppress the information from the credit file. Unfortunately for the debtor, this information can now be re-inserted later. This means that what the credit repair company was paid to accomplish actually was reversed and the money paid to the company was for nothing;
- More than half of the disputes to redit repair agencies are from credit repair companies. It is a paper game;
- If the dispute is identified as frivolous from a credit repair organization, it will be declared as fraudulent, and the CRA can block, the process;
- Consumers are constantly scammed into spending money for things they can do themselves;
Actions that consumers can do themselves to fix their credit
I interviewed a senior credit counsellor at Experian to review the intricacies of a credit report, and what a consumer should and should not do to affect their scores. Here is what she told me:
- Consumers can contact credit reporting agencies by email, by mail, or on-line to dispute inaccurate information. The process is simple and straightforward. They do not need someone else to do it for them for a fee;
- Consumers should use the money they would pay to repair organizations and give it to their creditors. Credit repair organizations are a short-term solution, which usually ends up in the debtor taking on more debt. Consumers are far better off paying down their debt;
- Credit reporting agencies can only remove inaccurate or erroneous information. They cannot legally alter or remove any accurate data, so the premise of what credit repair organizations claim they can do is flawed;
- Get a written statement from the creditor that indicates the information is wrong, or the account has been paid;
- Place a statement on your credit file if you have experienced a significant event in your life that has had an adverse impact on your ability to meet obligations. Fraud, identity theft, lost wallet, and serious medical issues can be noted in the file. There are instance where debtors get into trouble and a lender may waive the content of a negative report. As the result of an action by the New York Attorney General, credit reporting agencies will not report medical collections for up to 180 days;
- Work directly with your credit reporting agency;
- Check your credit report before you apply for credit, so you can correct any errors.
Before you apply for credit
Ask your creditor about their relationship with the credit reporting agency. Remember that credit reporting agencies only store data and cannot provide a credit score, unless it is based upon the Vantage 3.0 model.
Specifically ask your creditor:
- Do they report information, and if so, how and what information do they report, and to whom;
- What is the policy of the company regarding late payments;
- Does your company use credit scores, and if so, which model;
- Do they rely upon these scores;
- What is the range of credit scores they require for the credit you are applying for;
- If you are dealing with a property rental, do they report information, how soon do they begin reporting, and to what database.
If you are in trouble and thinking about using a credit repair company, remember there is nothing they can legally do to remove accurate yet derogatory information from your file. Whatever they can do, you can do for free. You have the right to dispute any information that is wrong and have it removed from your credit report. If you commit fraud in attempting to change the information on file, you can be prosecuted.
If a negative item is erased from your credit report, it may reappear after a period of time, so you will likely accomplish nothing by paying an illegitimate company to “fix” your credit. And if you succeed in totally wiping out your credit history by altering or creating a new identity, you will not be able to obtain any credit either, because a lender will have no data upon which to base a credit decision.
If you need help in repairing your credit, there are many legitimate companies that can assist you, but you need to research carefully to be certain the company is not a scam.
My best advice: work directly with a credit reporting agency like Experian. For $40 they will analyze your credit file and discuss it in detail with you, as well as running a simulation of payments to help you optimize the application of resources against your debt to drive up your credit score. All three CRAs have such programs.